Bonds CHP 6 Flashcards
What is the Coupon?
it is the interest payment paid to the bondholders and is fixed when the bond is issued
What is the face value?
The payment at the maturity of the bond
What is the coupon rate?
it is the annual intereest payment as a percentage of the face value of the bond
Bond characteristics
When you buy a bond you wiill pay more than the ask price, the extra you pay represents the accrued interest
Accrued interest
coupon interest earned from the last coupon payments to the purchase date of the bond
Clean Price
bond price excluding accrued interest
Dirty Price
bond price including the accrued interest
Value of a bond
is the present value of the bonds future cash flows - coupon payments and face value
What is the discount rate
is the rate at whcih cash flows from the bond are disctounted to determine its present value also known as the bond yield or market interest rate, the discount rate must captures the bonds oppurtunity cost of the capital - the current rate of interest on similar risk investments
coupon rate and discount rate
are not exactly the same when they are not the price of the bond and the fae value are not the same
Market interest rate
market intrest changes day to day, coupon payments are fixed when the bond is issued. changes in market interest rate affect the pv of coupon payments (but not the payments themselves) which causes changes in the bond price
Interest rates and bond prices
when market interest rate(discount rate) is higher than the coupon rate, bond slls for less than the face value (bonjd is selling at a discount) , when market intrest rate (discount rate) is lower than coupon rate, bonds sell for more than face value ( bond selling at a premium)
Interest rate risk
anincrease in rates causes a decrease in bond prices and an decrease in rates causes an increase in bond prices
current yield
focuses on current income, not the same as totl return
premium vs discount
if current yiled(market rate) is less than coupon rate, bond is selling at a premium , if current yiled is greater than coupon rate the bond is selling at a dicount
Yiled to MAturity
it measures the rate of return that you will earn if you buy the bond today and hold it to maturity focuses on pv of bonds cash flows ( both coupon income and capital gain/loss if bond is selling at a dicount there is a capital gain and when bnd is selling at premium there is a capital loss
rate of return
total incpmke per period per dollar invested
liquidity prefereance theory
assuems that investors prefer buying short term securities becasue these securities have less intrest rate risk
forward rate
the expected future interest rate implied by the current yield
default premim
is the difference between a promised yield on a coporate bond and the yied on a canada governemnt bond with same coupon and maturity
