Business 171B Chapter 6 Pricing Fixed Income Securities Flashcards
A bond is a ____
Debt security
Bonds are called _____
Fixed income securities
What do you do to N, I and PMT for a semi-annual bond calculation?
You multiply N by 2
You divide I and PMT by 2
Define Duration
Duration measures how sensitive the return on the bond will be to changes in interest rates.
What exactly is duration?
Duration measures how sensitive the return on the bond will be to changes in interest rates
A greater duration indicates…
A shorter duration indicates…
Greater indicates greater price sensitivity
Shorter duration indicates less price sensitivity
True or false
Bond prices move faster when rates decrease.
True
What is the difference between
Effective vs Nominal Interest Rates?
What is the difference between premium, discount and par bonds?
What is the difference between
“Discount” vs Interest Bearing securities?
Discount matures at face value, such as T-Bill, money market security, commercial paper.
Interest Bearing Securities obligates issuer to pay bondholder payments a specified amount as well as principal at maturity.
Duration: calculation, what affects it (maturity, coupon rate) and why is it important?
What is the Modified Duration calculation and what does it tells you?
If compounding is Annual, the Effective Rate is…?
If compounding is daily/monthly/quarterly, the Effective Rate is…?
YTM vs Coupon Rate (see book p. 222
If YTM = Coupon Rate, the bond Price is…?
If YTM < Coupon Rate, the bond Price is…?
Premium
If YTM > Coupon Rate, the bond Price is…?
Discount
What (who) determines YTM?
If market required rates of return go UP, bond prices go….?
Why?
What is Yield to Maturity
The total rate of return that a bond holder expects to earn if a bond is held to maturity.
