Bond Market Flashcards
primes rates, interest rates, bond basics
prime rates
The basic interest rate on short-term loans that the largest commercial banks charge to their most creditworthy corporate customers.
Federal funds rate
Interest rate that banks charge
each other for overnight loans of
$1 million or more .
call money rate
The interest rate brokerage firms pay for call money loans, which are bank loans to brokerage firms. This rate is used as the basis for customer rates on margin loans
commercial paper
Short-term, unsecured debt issued
by large corporations.
bonds
IOU that obligates the issuer to pay the bondholder a fi xed sum of money at the
bond’s maturity along with constant, periodic interest payments during the life of the bond
convertible
bonds
have a conversion feature that grants bondholders the right to convert their bonds into
shares of common stock of the issuing corporation.
“putable” bonds
have a put feature that grants bondholders the right to sell their bonds back to the issuer at a
prespecified price.
coupon rate
A bond’s annual coupon divided by
its par value. Also called coupon
yield or nominal yield.
current yield
A bond’s annual coupon divided by
its market price.
calculating bond’s price given its yield
bond price = coupon/ YTM [1-(1/(1+YTM/2^2M))] + FV/(1+YTM/2)^2M
C = Annual coupon, the sum of two semiannual coupons FV = Face value M = Maturity in years YTM = Yield to maturity
The price of the bond is the sum of the present values of coupons and principal
Premium bonds
Bonds with a price greater than par value are said to be selling at a
premium. The yield to maturity of a premium bond is less than its coupon rate.
Discount bonds
Bonds with a price less than par value are said to be selling at a discount.
The yield to maturity of a discount bond is greater than its coupon rate.
Par bonds.
Bonds with a price equal to par value are said to be selling at par. The
yield to maturity of a par bond is equal to its coupon rate.
Yield To Maturity (YTM)
the total return anticipated on a bond if the bond is held until it matures
Calculations of yield to maturity (YTM) assume that all coupon payments are reinvested at the same rate as the bond’s current yield, and take into account the bond’s current market price, par value, coupon interest rate, and term to maturity. YTM is a complex but accurate calculation of a bond’s return that can help investors compare bonds with diff
difference between ytm and current yield
Yield to maturity is very similar to current yield, which divides annual cash inflows from a bond by the market price of that bond to determine how much money one would make by buying a bond and holding it for one year. Yet, unlike current yield, YTM accounts for the present value of a bond’s future coupon payments. In other words, it factors in the time value of money, whereas a simple current yield calculation does not.
Read more: Yield To Maturity (YTM) | Investopedia https://www.investopedia.com/terms/y/yieldtomaturity.asp#ixzz5P1LTE9kW
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duration
A widely used measure of a bond prices’s
sensitivity to changes in bond
yields.
Duration is an approximate measure of a bond’s price sensitivity to changes in interest rates. If a bond has a duration of 6 years, for example, its price will rise about 6% if its yield drops by a percentage point (100 basis points), and its price will fall by about 6% if its yield rises by that amount.
yield to worst (YTW)
lowest potential yield that can be received on a bond without the issuer actually defaulting
givens investors the wrost case senario
yield to call
The yield to call tells you the total return you would receive if you were to buy and hold the security until the call date. As an investor, you should be aware that this yield is valid only if the bond is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date, and the market price of the bond
