Bonds Flashcards
What is a bond
A promise of future payment in exchange for cash today issued by governments and companies
What types of payments do you get from a bond
Coupons and the face value
What are coupons in a bond
Regular ongoing payments
What is the face value if a bond
The payment received at the maturity date
What is the coupon rate
The size if the coupon compared with the face value
How do you calculate the coupon size knowing the maturity, coupon rate and face value if a bond
CPN = (c*FV)/k
Coupon rate times face value divided by maturity in years
What is a zero coupon bond
A bind that does not pay coupons
What is the yield to maturity rate of a bond
The rate that compares the future payments of a bond and its price
How do you calculate the yield to maturity rate for a zero coupon bond
YTM=((FV/P)^1/n -1)
What is the spot rate
The yield to maturity rate fir a zero coupon bond
How co you calculate the price of bonds that pay coupons
P= CPN/y * (1- (1/(1+y)^N)) + FV/(1+y)^N
What is the currant yield
An approximation if yield to maturity rate it is calculated by dividing the coupon by the price
When are current yields a good approximation for yield maturity rate
When the maturity is long
What is a par bond
When the price equals the face value
What is a premium bond
When the price is higher than the face value
What is a discount bond
When the price is lower than the face value
What is the coupon in a par bond
The yield to maturity rate
What is the yield to maturity in a premium bond
Less than the coupon
What is the coupon in a dicount bond
Less than the yield to maturity rate ymt is higher on discount
What changes the quality of the bond
When the ymt is constant the present value of the other cashflows change and the change if market rates
What happens to the yield maturity rate if prices rise
It decreases
Why does the price of a bond increase with time if there is zero coupon but decrease if the coupon is high
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
Why do the price of bonds depend on the market interest rate
Because it changes the future value of the bond payments
Why are bonds with shorter time to mature less sensitive to changes in interest rate
Because more future payments affected by the change in rates remain on long term bonds
What are spot rates
Yield to maturity rates at a specific time spot
What is credit risk
The chance that a corporate bond seller cannot pay due to bankruptcy
Why are corporate bonds valued less than government bonds all else equal
Due to credit risk
What do corporate bonds do to be competitive
Offer a risk premium
What bind ratings are investment grade debt and what are speculative bonds
AAA-BBB is investment grade and BB-D are speculative
What is the danger if trusting bond ratings
Sometime the sellers and advisors are the raters
