boken kap 5 del 2 Flashcards
Q: How is the value of a bond determined?
A: By calculating the present value of its cash flows.
What does F, R and T stand for?
F = face value
R = market interest rate
T = years
Q: What does A_R^T represent?
A: The present value of an annuity of €1 per period for T periods at an interest rate per period of R.
Q: How is the present value of a consol calculated?
A: PV= C/R
Q: What are consols?
A: Consols are bonds with no maturity date that pay a coupon indefinitely.
Q: What is the relationship between interest rates and bond prices?
A: Bond prices fall when interest rates rise and rise when interest rates fall.
Q: When does a bond sell at a premium?
A: When the coupon rate is above the market-wide interest rate.
Q: When does a bond sell at a discount?
A: When the coupon rate is below the market-wide interest rate.
Q: What is Yield to Maturity (YTM)?
A: Yield to Maturity (YTM) is the total return an investor can expect if they buy a bond at its current market price and hold it until maturity, assuming all payments are made on time. It is the discount rate that equates the present value of the bond’s future cash flows to its current price.
Q: When does a level coupon bond sell at its face value?
A: When the coupon rate equals the market-wide interest rate.
Q: What two types of cash flows do equities provide?
A: Dividends and the sale price when sold.
What does y stand for in the formula for YTM?
The discount rate
Q: How is the value of an asset determined?
A: By the present value of its future cash flows.
