Annuities and Perpetuities, Bonds Flashcards
what is a green bond
bonds in which the proceeds of the borrowings go into ‘green’ economic activities
what are the pros of a company being financed by debt
no change in ownershop
no voting rights
tax advantage
what are the cons of a company being financed by debt
repayment - little wiggle room
too much debt is not good
what are the cons of a company being financed by equity
ownership and voting rights
no tax advantage
what are the pros of a company being financed by equity
no repayments
less likely to go bankrupt, more cushion
pros of issuing debt to companies as a bank
fixed return
safer - repaid before equity
what are the cons of lending to a compnay as a bank
lower return
non voting rights
can be less liquid
what are the cons of investing in a company
no fixed rate
risky
what are the pros of investing in a company
higher yields potentially
voting right
usually very liquid
what is the par value of a bond
the amount of money that bond issuers promise to repay bondholders at the maturity date of the bond
what is the maturity date of the bond
the date at which the bond redeems
does the maturity date ever change
no
what is a coupon payment
annual interest rate paid on a bond
does the coupon price ever change
no
who are the two issuers of bonds
banks and companies
governments
who buys bonds
larger institutional investors
large private investors
what is the primary bond market
when investors buy directly from the issuer when the bond is first issued
what is the secondary bond market
investors buying bonds from the market during the life of the bond
what is the difference between secured and unsecured bonds
• Unsecured bonds (debentures) are backed only by general faith and credit of issuer
• Secured bonds are backed
by specific assets (collateral)
why do the central bank and the government need to be separated
government wouldn;t want to change interest rates in the fear of not being reelected
example of a secured bond
mortgage
as bank can take back the house
what is the difference between fixed rate and floating rate bond
Fixed rate = coupon agreed on and doesn’t change
Floating rate = coupon can change eg tied to inflation
what is the floating rate made up of
benchmark rate + spread
which is more informative, the price of a bond or the yield
yield
what two things are a bond made up of
finite, regular, equal payments (annuity)
and
final payment
what three things are the coupon based on
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
what is the best credit rating
AAA
if the bond price is 100 then,
the yield = coupon
what are the reasons that a bond will trade above par value
risk is so low
investors think the coupon is not high enough
the interest rates have fallen
what factors affect the yield of a bond
risk free interest rates
credir risk
time to maturity
what price will the bond be at by its maturity date
par value
as there are no coupons left
what is credit spread
the difference between the yield of two bonds with similar maturity dates
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.
The default risk of the Irish government has decreased.
The default risk of the Italian government has increased.
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.
The real value of savings will increase
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)
The risk of default of the issuer of the bond has decreased.
how important are treasury bonds in affecting the value of US firms
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
poorly rated credit risk
BBB
do higher rated firms (AAA) have higher or lower yeilds
lower yields as deemed as less risky
what does PIIGS stand for
portugal ireland italy greece spain
why do firms monitor the price that their bonds trade for in the secondary market
threat of takeover
health of firm and building partnerhsips
staff performance,
know timing of when to issue more bonds
reasons the coupon might be lower than the yield
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
