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Financial Economics > Bonds > Flashcards

Bonds Flashcards

1
Q

What is a bond

A

A promise of future payment in exchange for cash today issued by governments and companies

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2
Q

What types of payments do you get from a bond

A

Coupons and the face value

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3
Q

What are coupons in a bond

A

Regular ongoing payments

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4
Q

What is the face value if a bond

A

The payment received at the maturity date

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5
Q

What is the coupon rate

A

The size if the coupon compared with the face value

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6
Q

How do you calculate the coupon size knowing the maturity, coupon rate and face value if a bond

A

CPN = (c*FV)/k

Coupon rate times face value divided by maturity in years

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7
Q

What is a zero coupon bond

A

A bind that does not pay coupons

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8
Q

What is the yield to maturity rate of a bond

A

The rate that compares the future payments of a bond and its price

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9
Q

How do you calculate the yield to maturity rate for a zero coupon bond

A

YTM=((FV/P)^1/n -1)

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10
Q

What is the spot rate

A

The yield to maturity rate fir a zero coupon bond

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11
Q

How co you calculate the price of bonds that pay coupons

A

P= CPN/y * (1- (1/(1+y)^N)) + FV/(1+y)^N

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12
Q

What is the currant yield

A

An approximation if yield to maturity rate it is calculated by dividing the coupon by the price

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13
Q

When are current yields a good approximation for yield maturity rate

A

When the maturity is long

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14
Q

What is a par bond

A

When the price equals the face value

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15
Q

What is a premium bond

A

When the price is higher than the face value

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16
Q

What is a discount bond

A

When the price is lower than the face value

17
Q

What is the coupon in a par bond

A

The yield to maturity rate

18
Q

What is the yield to maturity in a premium bond

A

Less than the coupon

19
Q

What is the coupon in a dicount bond

A

Less than the yield to maturity rate ymt is higher on discount

20
Q

What changes the quality of the bond

A

When the ymt is constant the present value of the other cashflows change and the change if market rates

21
Q

What happens to the yield maturity rate if prices rise

A

It decreases

22
Q

Why does the price of a bond increase with time if there is zero coupon but decrease if the coupon is high

A

If the coupon is high less coupon payments will be made as time progresses but as time goes the present value of the face value becomes larger when close to maturity

23
Q

Why do the price of bonds depend on the market interest rate

A

Because it changes the future value of the bond payments

24
Q

Why are bonds with shorter time to mature less sensitive to changes in interest rate

A

Because more future payments affected by the change in rates remain on long term bonds

25
Q

What are spot rates

A

Yield to maturity rates at a specific time spot

26
Q

What is credit risk

A

The chance that a corporate bond seller cannot pay due to bankruptcy

27
Q

Why are corporate bonds valued less than government bonds all else equal

A

Due to credit risk

28
Q

What do corporate bonds do to be competitive

A

Offer a risk premium

29
Q

What bind ratings are investment grade debt and what are speculative bonds

A

AAA-BBB is investment grade and BB-D are speculative

30
Q

What is the danger if trusting bond ratings

A

Sometime the sellers and advisors are the raters

Financial Economics (14 decks)

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