Bond Basics Flashcards
What are the characteristics of a “Zero coupon bond”?
- Stated par value with no stated interest rate
- Purchased at a DISCOUNT, and mature at PAR
- They are the most volatile price-wise
What combination makes a bond’s price very volatile?
Long maturity and low interest rate
Term bond characteristics and 1 example:
Issued and Mature on the same date
Example: US gov’t bonds
Serial bond characteristics and 1 example:
Issued on the same date, but mature on different date
Examples: Municipal bonds and corporate ETC’s
Series bond characteristic and 1 example:
All issued on different dates, but mature on the same date
Example: Long term construction
How are term bonds quoted?
At percentage of par (dollar bonds)
How are corporate bonds quoted?
Percent of par in 1/8ths
How are US Govt. bonds quoted?
Percent of par in 1/32nds
How are municipal bonds quoted?
On a yield basis
Where does most of a bond’s value lie?
In the final principal repayment
List of bond prices from highest to lowest for DISCOUNT bonds:
- YTC
- YTM
- CY
- Coupon/Nominal
List of bond prices from highest to lowest for a PREMIUM bond:
- Coupon
- CY
- YTM
- YTC
Define interest rate risk:
Risk that rising interest rates will call bond prices to fall (also called market risk)
Define Purchasing power risk:
Risk that inflation will lower the value of a bond (especially long term ones)
Marketability risk:
Risk that something will be hard to sell
Note: Not a risk for treasuries, but a big risk for munis