C6

Question 1

Bond

Answer 1

a security sold by government and corporations to raise money from investors today and in exchange for promised future payments

Question 2

Bond certificate

Answer 2

States the terms of the bond, which indicates the amounts and dates of all payments to be made

Question 3

Maturity date

Answer 3

Final payment date

Question 4

Term

Answer 4

Time remaining until repayment date

Question 5

Coupon

Answer 5

Promised interest payments

Question 6

Face value

Answer 6

Notioned amount used to compute interest payment

Question 7

Coupon rate

Answer 7

Determines the amount of each coupon payment, expressed in APR

Question 8

Zero coupon bond

Answer 8

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.

Question 9

Yield to maturity

Answer 9

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)

Question 10

Spot interest rate

Answer 10

a default free, zero coupon yield

Question 11

Zero coupon yield curve

Answer 11

a plot of the yield of the risk-free zero coupon bond as a function on the bonds maturity date

Question 12

Coupon bonds

Answer 12

Pay face value at maturity, pay regular coupon payments

Question 13

Treasury notes

Answer 13

US treasury coupon security with original maturities of 1-10 year

Question 14

Treasury bonds

Answer 14

US treasury coupon security with original maturities of over 10 years

Question 15

YTM of a coupon bond

Answer 15

P=CPN x 1/y (1-1/(1+y)^n) + FV/(1+y)^n

Question 16

Discount

Answer 16

A bond sells at discount if the price is less than face value

Question 17

Par

Answer 17

A bond sells at par when the price is equal to its face value

Question 18

Premium

Answer 18

A bond is selling at premium if the price is greater then the face value

Question 19

Time & bond prices

Answer 19

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

Question 20

Inverse interest rate and bond prices

Answer 20

If interest rates and bond rates fall, prices rises

If interest rates and bonds rise, prices fall

Question 21

Bond’s duration

Answer 21

Sensitivity of a bonds prices in interest rates

- bonds with high (low) durations are hihgly (low) sensitive to interest rate changes

Question 22

Replicating coupon bond

Answer 22

Use the law of one price to compute the price of a coupon bond from prices of the zero-coupon bond

Question 23

Treasury yield curves

Answer 23

To plot of the yields of coupon bonds of different maturities is called the coupon-paying yield curve.

Question 24

On-the-run Bonds

Answer 24

practitioners always plot the yield of the most recently issued bonds.

Question 25

Credit risk

Answer 25

Risk of default, the bond’s cash flows aren’t known for certain

Question 26

Certain default

Answer 26

When computing the yield to maturity for a bond with certain default, the promised cash flow rather than the actual cash flows are used:

Question 27

Investment Grade Bonds

Answer 27

The top 4 categories have a low default risk

Question 28

Speculative Bonds,

Answer 28

Also known as Junk Bonds or High-Yield Bonds: likelihood of default is high

Question 29

Default spread

Answer 29

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

Question 30

Sovereign Bonds

Answer 30

issued by national governments