Bond Pricing

Question 1

how do you value a bond?

Answer 1

PV of coupon payments + PV of Face Value of bond at maturity

Question 2

if the ytm is the same as the coupon percentage, what can be said about the bond?

Answer 2

the bond is trading at par value, face value

Question 3

what can be said about the bond when:

• ytm>coupon rate
• ytm

Answer 3

bond is trading at a discounted rate

bond is trading at a premium

Question 4

what happens to the discount and premium of a bond as it reached maturity?

Answer 4

they both decrease, at maturity the bond is equal to its face value

Question 5

when all returns on a bond are made through capital gain, what kind of bond is it?

Answer 5

a zero coupon bond

Question 6

what is the credit spread?

Answer 6

the difference between the promised yield to maturity and the government risk free rate

Question 7

what does y and f stand for in:

(1 + y1) (1 + f1,2) = (1 + Y2)^2

Answer 7

y is the spot rate of the relative period ie you can lend at this rate, or you can borrow by selling bonds
f is the forward rate form the span of period 1 to 2 in this case

Question 8

how do you ensure there is no arbitrage profit to be made?

Answer 8

when both spot and forward rates are non negative, (ie borrowing at a negative rate, payback less than you borrowed)

Question 9

when you calculate the ytm, what should you do with the high rate and what should you do with the low rate?

Answer 9

High rate: buy bonds, ie lend at the high rate

Low rate: sell bonds, ie borrow at the low rate