Bonds Flashcards
Discount
Bond will sell at a discount when Coupon Rate < YTM, Because:
* People can get higher return on investments at current
market rate
Premium
Bond will sell at premium when Coupon Rate > YTM,
People cant get a higher return anywhere else
Par value
A bond will be selling at par value when CR = YTM
Zero coupon bonds
Pay no coupon rate
Therefore price is always at a discount
* As the only return is capital gains
no face value at maturity
Yield to maturity
Investors will only earn this if the asset is held to maturity and all
coupons/cash flows are reinvested at the YTM rate
Yield to call
Maturity is first call date
And face value is the call price
Realised Compound Yield
(Ending Wealth/purchase price)1/n – 1
Premiums
These will get lower in value as time goes on, This is because there are less cash flows in the future
Discounts
These will get higher in value as time goes on
This is because there is less time to weight before they get the
capital gains
Bond prices move inversely to
interest rates
A long term bonds price will be affected more than a short term
bonds price
As this is true: As bond length increases, so does volatility of
price to yield
* However, as the length increase the volatility increases
at a diminishing rate (slope – note a straight line)
A bond with a low coupon rate will have a greater change in price
compared to a bond with a higher coupon rate
However this also increases at a diminishing rate (slope – note
a straight line
the higher the coupon rate (Coupons) the higher the weight on the CF inbetween, and therefore a
lower duration (shorter)
Duration for zero coupon bonds =
maturity
Coupon bonds duration
Duration increases with maturity (at a decreasing rate)
o The higher the coupon rate, the shorter the duration