Bonds

Question 1

Bond Certificate

Answer 1

states the terms of the bond

Question 2

Maturity Date

Answer 2

the date of the final repayment of the bond

Question 3

Term

Answer 3

the time remaining until the repayment date

Question 4

Coupon

Answer 4

the promised interest payment

Question 5

Face Value

Answer 5

the amount that will be repaid at maturity

Question 6

Coupon Rate

Answer 6

the amount of each coupon payment expressed as APR

Question 7

Coupon Payment Equation

Answer 7

Coupon Rate x Face Value/ Numbe

Question 8

Yield to Maturity

Answer 8

the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond

Question 9

Suppose we have a zero-coupon bond that matures in one year. It has a face value of $100,000 and is currently selling for $96,618.36. What is it’s yield to maturity?

Answer 9

Suppose we have a zero-coupon bond that matures in one year. It has a face value of $100,000 and is currently selling for $96,618.36. What is it’s yield to maturity?

PV = -96618
FV = 100000
N = 1
I/Y = ?                        = 3.5

Its yield to maturity is 3.5%.

Question 10

Determine the yield to maturity of the following $100 face value bonds with the present values listed below:

98.04, 95.18, 91.51, 87.14

Answer 10

find the ytms for each which are

2, 2.5, 3, 3.5

Question 11

Spot interest rates

Answer 11

the yield on a default-free zero coupon bond

Question 12

Zero-Coupon yield curve

Answer 12

a plot of the yields of risk-free zero-coupon bonds as a function of the bond’s maturity

Question 13

Yield Curve

Answer 13

a curve with the interest rates on the y axis, and the term in years on the x axis

Question 14

Coupon Bonds

Answer 14

bond that pay their investors their face value at maturity and also pay regular coupon interest payments

(1-10 years)=treasury notes
(10 years or greater)= treasury bonds

Question 15

ten year bond 
$1000 bond 
4 percent coupon 
semi-annual coupon payments 
what cash flows will you receive if you hold the bond until maturity

Answer 15

(4%x$1000)/2=$20 twice per year and then you will receive the $1000 ace value of the bond in ten years

Question 16

YTM of coupon bonds

Answer 16

YTM= the single discount rate that makes all of the bonds future payments equal to the bond’s present value

Question 17

5 year 
$1000 bond 
5% coupon rate 
semiannual coupons 
trading for $957.35
YTM=?

Answer 17

YTM=6%

multiply the YTM by 2 since there are 2 periods per year, this gives us the annual rate

Question 18

$1000 par semi annual bond
7 years until maturity
9% coupon rate
price is currently 1080.55

Answer 18

YTM=3.75X2=7.5

Question 19

5 year 
1000 semi-annual bond 
5% coupon rate 
YTM=6.3
price=?

Answer 19

divide everything by 2 except the interest rate which you multiply by 2

Question 20

Clean Price v.s. Dirty Price

Answer 20

Clean price is the price quoted on the bond, if the bond is sold immediately after the coupon payment is made then the clean price is the price which is paid for the bond

Dirty Price: clean price plus the accrued interest

Question 21

Calculating Dirty Price and the accrued interest formulal

Answer 21

Accrued Interest=coupon amount x (Days since last coupon payment divided by the days in the current coupon period

Question 22

Calculating the Coupon Rate

10 year 
$1000 bond 
annual coupons 
currrent price is $900 
YTM is 6%

Answer 22

find the payment of the bond and then divide that payment by the face value of the bond

Question 23

Discount, Par, and Premium Bonds

Answer 23

Discount- bonds are selling for less than there face value

Par- bonds are selling for exactly their face value

Premium- bonds are selling for more than their face value

Question 24

3 Bond Relationships

Answer 24

Coupon>YTM= Premium
Coupon=YTM=Par
Coupon

Question 25

Factors Affecting Bond Prices

Answer 25

1) As market interest rates change, bonds YTM and prices change
2) Holding market interests constant, as bonds move closer to maturity there present value changes

Question 26

Bond Relationships Pt. 2

Answer 26

There is an inverse relationship between interest rates and bond prices

• the sensitivity to changes in interest rate is called Duration
• bonds with high duration are highly sensitive to changes in interest rates
• bonds with low duration are less sensitive to changes in interest rates

Question 27

Duration Relationships

Answer 27

shorter maturity zero- coupon bonds are less sensitive to interest rate changes than longer term zero-coupon bonds

bonds with higher coupon rates are less sensitive to interest rate changes than bonds with lower coupon rates

Question 28

Calculate the Rate of Return on Bonds

Answer 28

1) Calculate the initial price
2) calculate the ending price of the bond
3) Divide the ending price by the initial price and raise it to the power of one over the number of years it has been held and then subtract 1

Question 29

purchase 15 year
zero coupon bond
with a YTM of 8%
hold the bond for five years

1) bond’s yield to maturity is 8% when you sell it, what is the IRR
2) ytm is 9%, when you sell it, what is the IRR of the investment

Answer 29

long solution on slides

Question 30

On the run bonds

Answer 30

treasury bonds that are the mosg recently issued

Question 31

use a bunch of zero coupon bonds to find the interest rate on a default free coupon bond

Answer 31

on slide

Question 32

Forward interest rate

Answer 32

interest rate that can be guaranteed today for a loan or investment in the future