Bond summary Flashcards
How are fixed income securities distinugished?
By their promise to pay a fixed or specified stream of income to their holders
What is a type of fixed income security?
A coupon bond
What are the original maturities of treasury notes & bonds?
> 1 year
they are issued at or near par value with their prices quoted net of accrued interest
What should callable bonds offer?
Higher promised YTMs to compensate investors for the fact they will not realise full capital gains should the interest rate fall and the bonds will be called away from them at the stipulated call price
Who do put bonds give the option to terminate/extend the life of the bond?
The bondholder rather than the issuer
What are convertible bonds?
They can be exchanged for a specified number if shares if stock
How do convertible bondholder pay for the option of exchange?
By accepting lower coupon rates on the security
What do floating rate bonds do?
They pay a coupon rate at a fixed premium over a reference short term interest rate
Risk is limited because the rate is tied to the current market conditions
What is the yield to maturity?
The single interest rate equating the present value of a security’s cash flow to its prices
What is the relationship between bond price and yield?
inverse
How do you distinguish premium and discount bonds?
Premium = Coupon rate > current yield > YTM
Discount = Coupon rat < current yield < YTM
How is YTM often interpreted and what is wrong with the interpretation?
IT’s interpreted as an estimate of the average rate of return to an investor than purchases a bond and holds it to maturity
It is subject to error
How do prices of zero coupon bonds evolve?
Rise exponentially over time providing a rate of appreciation = to the interest rate
When bonds are subject to potential default what is the stated YTM?
It’s the maximum possible YTM that can be realised by the bondholder
in the event of default the promised yield will not be realised so to compensate investors bonds must offer default premiums
What are default premiums?
promised yields in excess of those offered by default free government securities
if the firm remains healthy the bonds will provide higher returns than the government bonds
