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Finance > Annuities and Perpetuities, Bonds > Flashcards

Annuities and Perpetuities, Bonds Flashcards

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1
Q

what is a green bond

A

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

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2
Q

what are the pros of a company being financed by debt

A

no change in ownershop
no voting rights
tax advantage

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3
Q

what are the cons of a company being financed by debt

A

repayment - little wiggle room

too much debt is not good

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4
Q

what are the cons of a company being financed by equity

A

ownership and voting rights

no tax advantage

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5
Q

what are the pros of a company being financed by equity

A

no repayments

less likely to go bankrupt, more cushion

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6
Q

pros of issuing debt to companies as a bank

A

fixed return

safer - repaid before equity

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7
Q

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

A

lower return
non voting rights
can be less liquid

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8
Q

what are the cons of investing in a company

A

no fixed rate

risky

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9
Q

what are the pros of investing in a company

A

higher yields potentially
voting right
usually very liquid

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10
Q

what is the par value of a bond

A

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

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11
Q

what is the maturity date of the bond

A

the date at which the bond redeems

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12
Q

does the maturity date ever change

A

no

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13
Q

what is a coupon payment

A

annual interest rate paid on a bond

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14
Q

does the coupon price ever change

A

no

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15
Q

who are the two issuers of bonds

A

banks and companies

governments

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16
Q

who buys bonds

A

larger institutional investors

large private investors

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17
Q

what is the primary bond market

A

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

18
Q

what is the secondary bond market

A

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

19
Q

what is the difference between secured and unsecured bonds

A

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

• Secured bonds are backed
by specific assets (collateral)

20
Q

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

A

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

21
Q

example of a secured bond

A

mortgage

as bank can take back the house

22
Q

what is the difference between fixed rate and floating rate bond

A

Fixed rate = coupon agreed on and doesn’t change

Floating rate = coupon can change eg tied to inflation

23
Q

what is the floating rate made up of

A

benchmark rate + spread

24
Q

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

A

yield

25
Q

what two things are a bond made up of

A

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

26
Q

what three things are the coupon based on

A

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

27
Q

what is the best credit rating

A

AAA

28
Q

if the bond price is 100 then,

A

the yield = coupon

29
Q

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

A

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

30
Q

what factors affect the yield of a bond

A

risk free interest rates
credir risk
time to maturity

31
Q

what price will the bond be at by its maturity date

A

par value

as there are no coupons left

32
Q

what is credit spread

A

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

33
Q

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.

A

The default risk of the Irish government has decreased.

The default risk of the Italian government has increased.

34
Q

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.

A

The real value of savings will increase

35
Q

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)

A

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

36
Q

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

A

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

37
Q

poorly rated credit risk

A

BBB

38
Q

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

A

lower yields as deemed as less risky

39
Q

what does PIIGS stand for

A 
portugal
ireland
italy
greece
spain
40
Q

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

A

threat of takeover

health of firm and building partnerhsips

staff performance,

know timing of when to issue more bonds

41
Q

reasons the coupon might be lower than the yield

A

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

Finance (12 decks)

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