Bond Basics Flashcards

1
Q

What are the characteristics of a “Zero coupon bond”?

A
  • Stated par value with no stated interest rate
  • Purchased at a DISCOUNT, and mature at PAR
  • They are the most volatile price-wise
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2
Q

What combination makes a bond’s price very volatile?

A

Long maturity and low interest rate

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3
Q

Term bond characteristics and 1 example:

A

Issued and Mature on the same date

Example: US gov’t bonds

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4
Q

Serial bond characteristics and 1 example:

A

Issued on the same date, but mature on different date

Examples: Municipal bonds and corporate ETC’s

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5
Q

Series bond characteristic and 1 example:

A

All issued on different dates, but mature on the same date

Example: Long term construction

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6
Q

How are term bonds quoted?

A

At percentage of par (dollar bonds)

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7
Q

How are corporate bonds quoted?

A

Percent of par in 1/8ths

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8
Q

How are US Govt. bonds quoted?

A

Percent of par in 1/32nds

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9
Q

How are municipal bonds quoted?

A

On a yield basis

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10
Q

Where does most of a bond’s value lie?

A

In the final principal repayment

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11
Q

List of bond prices from highest to lowest for DISCOUNT bonds:

A
  1. YTC
  2. YTM
  3. CY
  4. Coupon/Nominal
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12
Q

List of bond prices from highest to lowest for a PREMIUM bond:

A
  1. Coupon
  2. CY
  3. YTM
  4. YTC
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13
Q

Define interest rate risk:

A

Risk that rising interest rates will call bond prices to fall (also called market risk)

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14
Q

Define Purchasing power risk:

A

Risk that inflation will lower the value of a bond (especially long term ones)

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15
Q

Marketability risk:

A

Risk that something will be hard to sell

Note: Not a risk for treasuries, but a big risk for munis

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16
Q

Liquidity risk:

A

Risk that security can only be sold by incurring large costs

17
Q

Reinvestment risk:

A

Risk that when interest is received and reinvested, it has to be reinvested at a lower yielding security because interest rates have fallen

18
Q

Exchange rate risK

A

Risk that value of foreign currency in which the investment is denominated will weaken

19
Q

What does the yield curve show?

A

Market rates of interest for bonds of different maturities and similar credit rankings

20
Q

When is a yield curve normal?

A
  • when monetary policy is LOOSENED
  • economic expansion
  • when maturities lengthen, yields increase
21
Q

When is the yield curve flat?

A
  • monetary policy is tightened

- occurs when economy is peaking

22
Q

When is the yield curve inverted?

A
  • short term rates rise ABOVE long term rates (inverted)

- severely tightened economic policy

23
Q

What are the 3 theories for yield curve shape?

A
  1. liquidity preference
  2. Market segmentation
  3. Expectations (positive - rates rise, negative - rates fall)
24
Q

What is the yield spread, and what does it mean?

A

Yield spread is the difference between Government and AAA rated corporate yields:

Widening spread means coming recession (Widen = Worry)
Narrowing spread means coming expansion (Narrow = No worry)

25
Q

What is the formula for YTM for a premium bond?

A

(Bond cost + Redemption price) / 2

26
Q

What is the formula YTM for a discount bond?

A

(Bond cost + Redemption price) / 2

27
Q

How are inflation rates and interest rates correlated?

A

Positively correlated. If inflation goes up, interest rates go up, and vice versa

28
Q

The credit rating of a guaranteed corporate bond is based on the credit quality of the…

A

Corporate GUARANTOR (not the issuer)