C6 Flashcards
Bond
a security sold by government and corporations to raise money from investors today and in exchange for promised future payments
Bond certificate
States the terms of the bond, which indicates the amounts and dates of all payments to be made
Maturity date
Final payment date
Term
Time remaining until repayment date
Coupon
Promised interest payments
Face value
Notioned amount used to compute interest payment
Coupon rate
Determines the amount of each coupon payment, expressed in APR
Zero coupon bond
A bond with no coupon payments, only the face value of the bond on the maturity date. They always sell at discount (lower than FV), they are called pure discount bonds.
Yield to maturity
the rate of return that investors will earn on theid money if they buy the bond at its current price and hold it to maturity. The IRR of an investment in a bond is the yield to maturity (YTM)
Spot interest rate
a default free, zero coupon yield
Zero coupon yield curve
a plot of the yield of the risk-free zero coupon bond as a function on the bonds maturity date
Coupon bonds
Pay face value at maturity, pay regular coupon payments
Treasury notes
US treasury coupon security with original maturities of 1-10 year
Treasury bonds
US treasury coupon security with original maturities of over 10 years
YTM of a coupon bond
P=CPN x 1/y (1-1/(1+y)^n) + FV/(1+y)^n
Discount
A bond sells at discount if the price is less than face value
Par
A bond sells at par when the price is equal to its face value
Premium
A bond is selling at premium if the price is greater then the face value
Time & bond prices
When everything is constant
- YTM wil not change
- Price of discount or premium bond will move to par over time
When the YTM has not change, then the IRR =YTM if you sell the bond early
Inverse interest rate and bond prices
If interest rates and bond rates fall, prices rises
If interest rates and bonds rise, prices fall
Bond’s duration
Sensitivity of a bonds prices in interest rates
- bonds with high (low) durations are hihgly (low) sensitive to interest rate changes
Replicating coupon bond
Use the law of one price to compute the price of a coupon bond from prices of the zero-coupon bond
Treasury yield curves
To plot of the yields of coupon bonds of different maturities is called the coupon-paying yield curve.
On-the-run Bonds
practitioners always plot the yield of the most recently issued bonds.
Credit risk
Risk of default, the bond’s cash flows aren’t known for certain
Certain default
When computing the yield to maturity for a bond with certain default, the promised cash flow rather than the actual cash flows are used:
Investment Grade Bonds
The top 4 categories have a low default risk
Speculative Bonds,
Also known as Junk Bonds or High-Yield Bonds: likelihood of default is high
Default spread
Also known as Credit Spread
We refer to the difference between the yield on corporate bonds and Treasury yields as the default spread or credit spread. Credit spreads fluctuate as perceptions regarding the probability of default change
Sovereign Bonds
issued by national governments
