Ch 5 - Bonds Flashcards
What are bonds?
Fixed income securities issued mainly by corporations and governments
In what 2 ways do bond holders receive income?
Coupon/interest payments, principle payment
In bond valuation, the cashflows associated with the bond is discounted at the ________
YTM/ mkt int rate/ cost of debt
Price of a bond =_________
PV of all future CFs
Coupon/int payment = ______ x ________
Face value/ par value/ nominal value x coupon rate
What a re zero coupon bonds?
Bonds that do not provide periodic incomes to the holder, They are purchased at a discount to the face value and redeemed at the face value
When coupond rate > YTM and price > FV, it is a ______
Premium bond
When coupon = YTM and price= FV, it is a _____
Par bond
When coupon < YTM and price < FV , it is a _______
Discount bond
What are the 3 types of interest rates used to discount bonds?
Market discount rate, YTM (IRR) , Spot rates
What is YTM?
The return that the bond holder derives by holding the bond till it matures
What is a spot rate?
The int rate that fall on a specific time period F
For zero coupon bonds, the ____ and the ______ are the same
Spot rate, YTM
Spot rates and YTMs for _____ are never the same
Coupon bonds
Zero coupon bond rates are simply _______
Spot rates
What is a forward rate?
Current expectations of future bond interest rates or currency exchange rates
Forward rates are future __________
Spot rates
What is meant by arbitrage?
Ability to make riskless profits due to mispricing between assets
What do you mean by the ‘term structure of interest rates’?
The relationship between yields and time to maturity of fixed income securities issued, mainly by governments
What are the 4 shapes yield curves can take?
Flat, rising, inverted, hump-shaped
What are 3 theories that have been put forward to explain the different shapes of the yield curve?
Liquidity preference theory, expectations hypothesis, segmentation hypothesis
There’s a _________ relationship between bond prices and int rates
Negative
Duration of coupon bonds is always ________ the maturity
Lower
Duration of zeros will always be _______ the maturity
Equal to
Modified duration always ____ price falls and _________ price increases
Overestimates, underestimates
What is ‘Horizon return’
Return realized for the period that the bond is held