Annuities and Perpetuities, Bonds

Question 1

what is a green bond

Answer 1

bonds in which the proceeds of the borrowings go into ‘green’ economic activities

Question 2

what are the pros of a company being financed by debt

Answer 2

no change in ownershop
no voting rights
tax advantage

Question 3

what are the cons of a company being financed by debt

Answer 3

repayment - little wiggle room

too much debt is not good

Question 4

what are the cons of a company being financed by equity

Answer 4

ownership and voting rights

no tax advantage

Question 5

what are the pros of a company being financed by equity

Answer 5

no repayments

less likely to go bankrupt, more cushion

Question 6

pros of issuing debt to companies as a bank

Answer 6

fixed return

safer - repaid before equity

Question 7

what are the cons of lending to a compnay as a bank

Answer 7

lower return
non voting rights
can be less liquid

Question 8

what are the cons of investing in a company

Answer 8

no fixed rate

risky

Question 9

what are the pros of investing in a company

Answer 9

higher yields potentially
voting right
usually very liquid

Question 10

what is the par value of a bond

Answer 10

the amount of money that bond issuers promise to repay bondholders at the maturity date of the bond

Question 11

what is the maturity date of the bond

Answer 11

the date at which the bond redeems

Question 12

does the maturity date ever change

Answer 12

no

Question 13

what is a coupon payment

Answer 13

annual interest rate paid on a bond

Question 14

does the coupon price ever change

Answer 14

no

Question 15

who are the two issuers of bonds

Answer 15

banks and companies

governments

Question 16

who buys bonds

Answer 16

larger institutional investors

large private investors

Question 17

what is the primary bond market

Answer 17

when investors buy directly from the issuer when the bond is first issued

Question 18

what is the secondary bond market

Answer 18

investors buying bonds from the market during the life of the bond

Question 19

what is the difference between secured and unsecured bonds

Answer 19

• Unsecured bonds (debentures) are backed only by general faith and credit of issuer

• Secured bonds are backed
by specific assets (collateral)

Question 20

why do the central bank and the government need to be separated

Answer 20

government wouldn;t want to change interest rates in the fear of not being reelected

Question 21

example of a secured bond

Answer 21

mortgage

as bank can take back the house

Question 22

what is the difference between fixed rate and floating rate bond

Answer 22

Fixed rate = coupon agreed on and doesn’t change

Floating rate = coupon can change eg tied to inflation

Question 23

what is the floating rate made up of

Answer 23

benchmark rate + spread

Question 24

which is more informative, the price of a bond or the yield

Answer 24

yield

Question 25

what two things are a bond made up of

Answer 25

finite, regular, equal payments (annuity) and final payment

Question 26

what three things are the coupon based on

Answer 26

where interest rates are at the minute how long is it being borrowed for - longer means more can go wrong how credit worthy are you eg German Government vs Greek

Question 27

what is the best credit rating

Answer 27

AAA

Question 28

if the bond price is 100 then,

Answer 28

the yield = coupon

Question 29

what are the reasons that a bond will trade above par value

Answer 29

risk is so low investors think the coupon is not high enough the interest rates have fallen

Question 30

what factors affect the yield of a bond

Answer 30

risk free interest rates credir risk time to maturity

Question 31

what price will the bond be at by its maturity date

Answer 31

par value as there are no coupons left

Question 32

what is credit spread

Answer 32

the difference between the yield of two bonds with similar maturity dates

Question 33

Currently the yield on 10y Italian goverment bonds is 1.91 % and on Irish government bonds 0.81%. If the difference between these yields has increased, which of the following two events may have occurred? The default risk of the Italian government has increased. Risk-free interest rates have increased. The default risk of the Irish government has decreased. Risk-free interest rates have decreased.

Answer 33

The default risk of the Irish government has decreased. The default risk of the Italian government has increased.

Question 34

In a high inflationary environment which one of the following statements is NOT true? The real value of savings will increase. The real value of debt will decrease. The value of debt relative to wages and prices will decrease. The value of savings relative to wages and prices will decrease.

Answer 34

The real value of savings will increase

Question 35

Which one of the following factors would NOT cause the yield of a bond to be higher than the coupon of the bond The risk of default of the issuer of the bond has decreased. The risk-free interest rate has increased Inflationary expectations have increased (and thus the expectation of interest rate increases)

Answer 35

The risk of default of the issuer of the bond has decreased.

Question 36

how important are treasury bonds in affecting the value of US firms

Answer 36

t bonds price is used as benchmark price (risk free) and then additional market risk is added on top of this. So if the t bond rate is lower, the value of the firm will be lower

Question 37

poorly rated credit risk

Answer 37

BBB

Question 38

do higher rated firms (AAA) have higher or lower yeilds

Answer 38

lower yields as deemed as less risky

Question 39

what does PIIGS stand for

Answer 39

``` portugal ireland italy greece spain ```

Question 40

why do firms monitor the price that their bonds trade for in the secondary market

Answer 40

threat of takeover health of firm and building partnerhsips staff performance, know timing of when to issue more bonds

Question 41

reasons the coupon might be lower than the yield

Answer 41

changes to fairly reflect interest rates and inflation rates set by central banks (seesaw) credit rating changes - changes to reflect change in borrowers riskiness changes with maturity of bond - gets lower as bond gets closer to matuirty as less can go wrong