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Investment Planning > Bond Valuation (Lesson 6) > Flashcards

Bond Valuation (Lesson 6) Flashcards

1
Q

What is the coupon rate of a bond

A
  • the periodic interest payment received by a bond holder
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2
Q

What is the par value of a bond

A
  • the principal amount which is $1,000 on bond issues unless stated otherwise
  • Amount that will be repaid to bond investors at the end of the loan period
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3
Q

What is the length of time to maturity of a bond

A
  • the time remaining until the bond holder receives the par value
  • Number of periods to maturity or that the loan will be outstanding
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4
Q

What is the market interest rate of a bond

A
  • is the yield that is currently being earned in the marketplace on comparable securities
  • Rate that is used to discount a bond to determine what is currently selling for in the market
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5
Q

Do changes in interest rates in the marketplace affect the coupon payment

A

No

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6
Q

Rising interest rates in the marketplace means than old issued bonds will sell at a

A

discount

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7
Q

Falling interest rates in the marketplace means that old issued bonds will sell at a

A

premium

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8
Q

How do you calculate the coupon rate of the bond

A
  • Coupon rate = Coupon payment / Par
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9
Q

How do you calculate the current yield of a bond

A
  • Current yield = Coupon payment / Price of bond
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10
Q

What is the yield to maturity of a bond

A
  • essentially the compounded rate of return if an investor buys a bond today and holds it until maturity
  • Assumes that the investor is able to reinvest the coupon payment at the yield to maturity rate
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11
Q

What is the yield to call of a bond

A
  • the compounded rate of return if an investor buys a bond today and the bond is called by the issuer
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12
Q

Bonds selling at a discount put the below in order from smallest to largest

Yield to Maturity

Current Yield

Yield to Call

Nominal Yield

A
  • Nominal yield
  • Current yield
  • Yield to Maturity
  • Yield to Call
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13
Q

Bonds selling at a Premium put the below in order smallest to largest

Yield to Maturity

Current Yield

Yield to Call

Nominal Yield

A
  • Yield to call
  • Yield to maturity
  • Current yield
  • Nominal yield
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14
Q

Does the coupon rate change whether a bond sells at a premium or discount

A
  • No stays consistent
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15
Q

What is accrued interest

A
  • when purchasing a bond the buyer pays the seller interest that has accrued since the last interest payment
  • Buyer will receive a 1099 INT that reflects the full periods interest received however the buyer is entitled to a deduction equal to the amount of accrued interest paid to the seller
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16
Q

What type of account should treasury zero coupon bonds be held in

A
  • IRA because the bond pays phantom income
  • The IRA will not require the recognition of the phantom income
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17
Q

(Yield Curve Theories)

Liquidity Preference Theory

A
  • yield curve results in a lower yield for shorter maturities
  • investors prefer liquidity and are willing to pay for liquidity in the form of lower yields
  • States long term yields should be higher than short term yields because of the added risk
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18
Q

(Yield Curve Theories)

Market Segmentation Theory

A
  • Yield curve depends on supply and demand at a given maturity and there are distinct markets for given maturities with distinct buyers and sellers at each maturity
  • When supply is greater than demand at a given maturity rates are low (Rates will then have to increase for demand to increase)
  • When demand is greater than supply at a given maturity rates are high (Rates will then begin to decrease to drive demand down)
19
Q

(Yield Curve Theories)

Expectations Theory

A
  • Yield curve reflects investors inflation expectations
  • since investors are uncertain or believe inflation will be higher in the future long term yields are higher than short term yields
  • When inflation is expected to be lower in the future the yield curve will be inverted
20
Q

What is the unbiased expectations theory

A
  • related to the term structure of interest rates
  • holds that today’s long term interest rates have imbedded in them expectations about future short term interest rates
  • Long term rates are geometric averages of current and expected future shorter term interest rates
21
Q

What is duration

A
  • the weighted average maturity of all cash flows
  • larger the duration the more price sensitive or volatile the bond is to interest rate change
  • When investor is immunized from interest rate and reinvestment rate risk
  • Duration should equal the investors time horizon
22
Q

What is the duration of a zero coupon bond

A
  • duration equals its maturity
23
Q

As the coupon rate increases the duration

A
  • decreases
24
Q

As yield to maturity increases the duration

A
  • decreases
25
Q

In the duration formula on the CFP formula sheet:

D = (1 + y / y) - {(1+y) + t(c-y)}/c{1 + y)t - 1 } +y

What is y? What is c? What is t?

A
  • y = yield to maturity of the bond
  • c = Coupon rate of the bond
  • t = Number of periods to maturity
26
Q

How are y, c, and t adjusted in the duration formula if compounding is semiannual

A
  • Divide y and c by 2
  • Multiply t by 2
27
Q

What does duration assume

A
  • that there is a linear relationship between a change in interest rates and a bonds price change (Actually though the relationship is a curve linear)
28
Q

What is convexity

A
  • is a concept that actually measures the difference in price between what duration estimates and the actual price change of a bond
29
Q

Does duration understate or overstate the price appreciation when interest rates decrease

A
  • understates
30
Q

Does duration understate or overstate the price appreciation when interest rates increase

A
  • overstates
31
Q

(Bond Strategies)

Tax Swap

A
  • involves selling a bond that has a gain and a bond that has a loss which offset each other
  • involves selling a bond that has a loss position and just buying a new bond
32
Q

(Bond Strategies)

Barbells

A
  • involves owning both short term and long term bonds
  • when interest rates move only one set of positions needs to be sold and restructured
33
Q

(Bond Strategies)

Laddered Bonds

A
  • requires purchasing bonds with varying maturities
  • as bonds mature, new bonds are purchased with longer maturities than what is outstanding in the portfolio
  • helps recue interest rate risk
34
Q

(Bond Strategies)

Bullets

A

have very little payments during the interim period and then a lump sum at the some specified date in the future

  • Most of the bonds will mature in or around the same time period
  • Zero coupons, treasuries, and corporates are good candidates
  • usually used when the investor has a balloon payment due on a liability at some future date
35
Q

Preferred stock has both a

A

equity and debt feature

36
Q

What is the difference between a preferred stock and a bond

A
  • no maturity date like a bond
37
Q

What is the difference between a preferred stock and a common stock

A
  • Dividend does not fluctuate like a common stock
  • price of preferred stock is more closely tied to interest rates than common stock
38
Q

What are the tax advantages of a preferred stock

A
  • Corporation receives a 50 or 65% deduction of dividends based on percentage of ownership of the company paying the dividends for tax years after 12/31/2017
39
Q

What is the conversion value of a convertible bond

A
  • is the value of the convertible bond in terms of the stock into which it can be converted
40
Q

What is the primary benefit of a convertible bond

A
  • even if the stock does not perform well the investor has a floor built in
  • floor is the par value of the bond that the investor will receive if the convertible is held until maturity
41
Q

What is the formula for conversion value of a convertible bond

A

CV = (PAR/CP) x Ps

  • Ps = the price of the common stock
  • CP = the conversion price
42
Q

What is the property valuation formula

A

Capitalized Value = Net operating income/ Capitalization rate

Capitalization rate = NOI / Cost

43
Q

How do you calculate Net operating income

A

Gross Rental Receipts

+ Non Rental Income

= Potential Gross Income

  • Vacancy & Collection losses

= Effective gross income

  • Total Expenses

= Net Income

+ Interest Expense

+ Depreciation Expense

= Net Operating Income

Investment Planning (8 decks)

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