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59 Cards in this Set
- Front
- Back
What does a bond involve?
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Paying you regular payments as well as a lump sum (principal) at the end of the loan period
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Coupon
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Stated interest payment made on a bond - regular payment each time interval
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How do you calculate a coupon?
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Coupon rate x Face Value
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Face Value
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Principal amount of a bond that is repaid at the end of the term
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What is Face Value also known as?
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Par Value
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Coupon Rate
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The annual coupon divided by the face value of the bond
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Maturity
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Date on which the principal amount of a bond is paid
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YTM
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Yield to Maturity - The interest rate on a bond required in the market
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As YTM increases, Price _____.
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Decreases
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Discount Bond
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When the YTM increases and the price decreases below Face Value
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As YTM decreases, Price _______.
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Increases
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Premium Bond
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When the YTM decreases, the price of the bond increases above Face Value
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If the YTM is less than the coupon rate, Bond price is _______
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Higher
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If the YTM is greater than the coupon rate, Bond price is ______
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Lower
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Bond price is higher when the YTM is _______ than the coupon rate
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Less
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Bond Price is lower when the YTM is _______ than the coupon rate
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Greater
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What is a bond called when the YTM = Coupon rate?
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Par bond - trading at par
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When YTM = Coupon rate what is the relationship between bond price and face value?
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Bond price = face value
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Par Bond
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When YTM = Coupon rate and thus Bond price = face value
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Interest Rate Risk
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The risk that arises for bond owners from fluctuating interest rates
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When interest rate is high, bond price is _______
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Low
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When interest rate is low, bond price is ______
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High
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What does the interest rate risk of a bond depend on?
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- Time to maturity
- Coupon rate |
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The longer the time to maturity, the ______ the interest rate risk
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Greater
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The _______ the time to maturity, the greater the interest rate risk
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Longer
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The lower the coupon rate, the _____ the interest rate risk
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Greater
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The ______ the coupon rate, the greater the interest rate risk
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Lower
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Zero Coupon Bond
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A bond that makes no coupon payments and thus is initially priced at a deep discount
--> no 'g' in the equation |
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Bond indenture
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Contract between company and bond holders
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What does a bond indenture include?
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- basic terms of bond
- Total amount and value of bonds issued - Description of property used as a security - Call provisions - Details of protective covenants |
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Nominal rate
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Interest rates of rates of return that have NOT been adjusted for inflation
- includes the effect of inflation within the measure Nominal rate = real rate + inflation |
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Real Rate
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Interest rates or rates of return that HAVE been adjusted for inflation
- the rate after inflation has been removed |
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Term structure
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The relationship between nominal interest rates on default-free, pure discount securities and time to maturity
--> shows how interest rates on bonds change with maturity --> Relationship between maturity and yields, all else equal |
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Which factors affect YTM?
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- Default risk premium
- Liquidity premium |
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Default risk premium
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The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
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Low bond ratings require _____ yields
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Higher
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Tax free bonds have _______ yields
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Lower
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_____ Bond ratings require higher yields
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Low
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_______ bonds have lower yields
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Tax-free
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Liquidity Premium
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The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity (saleability)
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Less liquid bonds have ______ yields
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Higher
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______ liquid bonds have higher yields
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Less
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Bonds that have more frequent trading have _______ required yields
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Lower
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Bonds that have _____ frequent trading have lower required yields
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More
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Yield Curve
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A plot of the yields on a particular security relative to maturity
--> graph of the term structure |
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Normal yield curve
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Upward sloping
--> Long-term yields/rates are higher than short-term yields/rates |
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Inverted yield curve
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Downward sloping
--> Short-term yields/rates are higher than long-term yields/rates |
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Long-term yields are higher than short term yields
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Normal
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Short-term yields are higher than long-term yields
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Inverted
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Debt or Equity: Ownership interest
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Equity
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Debt or Equity: Not ownership interest
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Debt
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Debt or Equity: Creditors do not have voting rights
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Debt
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Debt or Equity: Shareholders vote in board of directors
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Equity
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Debt or Equity: Legalities if interest/principal payments missed
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Debt
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Debt or Equity: Dividends not a liability of company until declared
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Equity
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Index Bond
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The principal is adjusted according to the rate of inflation and the coupon interest is then paid on the new principal
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Floating Rate Bond
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Coupon Payments are adjustable
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Subordinated Bonds
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In the event of liquidation, these bonds rank behind all other debtors
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Convertible Bond
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Can be swapped for shares
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