Bonds quick tips Flashcards
What does it mean if a bonds yield is less than its coupon rate?
It means that rates have come down, bond prices have gone up and the bond is selling at a premium to it’s par value.
What does a long term to maturity and a low coupon rate mean in the world of bonds?
It is more volatile - long term to maturities and low coupons means the bond will be more sensitive to yield changes
What is a bond’s coupon rate?
The amount of interest paid annually from the bond
- they are associated with regular interest payments made by bonds and are influenced by prevailing interest rates
- largely influenced by interest rates set by gov’t
- lower coupon bonds are offset by lower prices to compensate for the lower coupon rate
- regardless of the purchase price coupon payments remain the same
What is a bond’s Yield?
It can be measured a few different ways but yield compares coupon rate to the current market price of the bond. Because Bond and market prices can flucutate you can purchase bonds for above or below $1000 (par, premium, discount) and thus affecting your yield rate, remember coupon remains the same.
Yield to Maturity takes this a step further in the analysis
What does it mean if the coupon rate is higher than yield?
The bond is trading at a premium, people will pay more for the bond for the higher coupon rates. Hence why rates have an inverse relationship with bond prices.
What is the difference between coupon rate and interest rate?
Coupon rate is the interest paid from a bond RELATIVE to it’s par value. For a fixed rate bond this will be the same until maturity. A bond coupon rate will reflect prevailing interest rates when it was FIRST issued.
How do you calculate a bonds yield?
Coupon payment / face value
Coupon and Yield Rates go hand in hand, why?
Coupon rate is the annual interest rate of the bond, which affects the market price of the bond. This in turn impacts the yield of the bond, which is the amount of return generated in relation to its face value price. Both are important factors when deciding which bonds to invest in.
What does a bond’s coupon rate influence?
The bond’s price and thus competitiveness and value in the open market
What happens if the coupon rate is higher than the prevailing interest rates?
The bonds price rises! If the coupon is lower the price price falls q
