Bond

Question 1

What does the symbol P represent?

Answer 1

The price of a bond.

Question 2

What does the F symbol represent?

Answer 2

It is the par value (face amount) it is not a cash flow

Question 3

What does the symbol r represent?

Answer 3

It is the coupon rate per payment period.

Question 4

What does the symbol Fr represent?

Answer 4

It is the amount of each coupon payment.

Question 5

What does the symbol C represent?

Answer 5

It is redemption. value of a bond. If C is not specified, it is equal to F.

Question 6

What does the symbol i represent?

Answer 6

Interest per payment period.

Question 7

What does the symbol n represent?

Answer 7

The number of coupon payments.

Question 8

What is the basic formula to evaluate the price of a bond?

Answer 8

Question 9

What is the premium/discount formula?

Answer 9

Question 10

What is the condition to have a premium bond?

Answer 10

P > C or Fr > Ci

Question 11

What is the condition to have a discount bond?

Answer 11

P < C or Fr < Ci

Question 12

What is the amortization process of a premium bond?

Answer 12

It is a write-down

Question 13

What is the amortization process of a discount bond?

Answer 13

It is a write-up

Question 14

How do you calculate the amount of a discount/premium bond? Give the equivalence

Answer 14

Question 15

What is the formula for the book value of a bond?

Answer 15

Question 16

What is the formula to calculate the interest earned with a bond payment?

Answer 16

Question 17

How do we call a person that issues a bond?

Answer 17

It is a bond issuer.

Question 18

What do we call a person that buys a bond?

Answer 18

It is a bond investor.

Question 19

What are coupons?

Answer 19

They are periodic interest payments (annuity).

Question 20

What is a redemption value?

Answer 20

It is one large payment at the end of the bond term.

Question 21

What is a yield rate?

Answer 21

It is the constant rate at which the bond’s discounted future cash flows equal its price. It is the return the investor earns from investing in the bond.

Question 22

What is a zero-coupon bond?

Answer 22

It is a bond that doesn’t pay coupons.

Question 23

What happens if the price of a bond increases?

Answer 23

The yield will decrease.

Question 24

What happens if the interest rate used to discount a bond’s cash flows decreases?

Answer 24

The present value of the bond increases.

Question 25

What happens if the bond is a premium?

Answer 25

- The bond investor is receiving larger coupons than expected interest payments. So, the investor should pay more for the bond. As a result, P>C. - The premium is equal to P-C and needs to be positive.

Question 26

What happens if the bond is a discount?

Answer 26

- The bond investor is receiving smaller coupons than expected interest payments. So, the investor should pay less for the bond. As a result, P

Question 27

What happens if the bond is a par bond?

Answer 27

- There is no premium or discount - The bond is purchased at par (P=C)

Question 28

What is a write-down?

Answer 28

It is the amount of each coupon payment left after interest. It is deducing the book value.

Question 29

What is another name for write-down?

Answer 29

The amount for amortization of premium.

Question 30

What happens if the write-down is negative?

Answer 30

We write it as a positive number and call it a write-up.

Question 31

What is another name for a write-up?

Answer 31

It is the amount for accumulation of discount.

Question 32

What is a callable bond?

Answer 32

It is a bond that is retrieved before the original maturity date.

Question 33

What is a yield to worst?

Answer 33

It is the worst yield that you can have in the scenarios.

Question 34

What is a call date?

Answer 34

It is a date at which the bond is terminated in a callable bond.

Question 35

What is a call price?

Answer 35

It is additional cash flow the investor receives if the bond terminates on a call date.

Question 36

What is the advantage of a callable bond for the bond issuer?

Answer 36

It provides protection if there is a decrease in interest rates.

Question 37

How do you evaluate the good choice to make regarding a callable bond?

Answer 37

- With a given price, the lowest yield rate calculated is the minimum yield that an investor would earn. - With a given yield rate, the lowest price calculated is the maximum price that an investor would pay.

Question 38

What are the 2 steps of the endpoint shortcut?

Answer 38

1) Calculate the price of the bond called at both endpoints for each call period and the redemption date. 2) Identify the lowest value from step 1.

Question 39

What is the premium/discount shortcut?

Answer 39

1) Identify it the bond is a premium or discount bond. 2) - If it is a premium bond, call the bond on the first call date. - If it is a discount bond, call the bond on the last call date. 3) Compare values from each level call date period, and the redemption date if the maturity is not one of the endpoints. 4) Choose the lowest value from each of these options.