Ch 5 - Bonds

Question 1

What are bonds?

Answer 1

Fixed income securities issued mainly by corporations and governments

Question 2

In what 2 ways do bond holders receive income?

Answer 2

Coupon/interest payments, principle payment

Question 3

In bond valuation, the cashflows associated with the bond is discounted at the ________

Answer 3

YTM/ mkt int rate/ cost of debt

Question 4

Price of a bond =_________

Answer 4

PV of all future CFs

Question 5

Coupon/int payment = ______ x ________

Answer 5

Face value/ par value/ nominal value x coupon rate

Question 6

What a re zero coupon bonds?

Answer 6

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

Question 7

When coupond rate > YTM and price > FV, it is a ______

Answer 7

Premium bond

Question 8

When coupon = YTM and price= FV, it is a _____

Answer 8

Par bond

Question 9

When coupon < YTM and price < FV , it is a _______

Answer 9

Discount bond

Question 10

What are the 3 types of interest rates used to discount bonds?

Answer 10

Market discount rate, YTM (IRR) , Spot rates

Question 11

What is YTM?

Answer 11

The return that the bond holder derives by holding the bond till it matures

Question 12

What is a spot rate?

Answer 12

The int rate that fall on a specific time period F

Question 13

For zero coupon bonds, the ____ and the ______ are the same

Answer 13

Spot rate, YTM

Question 14

Spot rates and YTMs for _____ are never the same

Answer 14

Coupon bonds

Question 15

Zero coupon bond rates are simply _______

Answer 15

Spot rates

Question 16

What is a forward rate?

Answer 16

Current expectations of future bond interest rates or currency exchange rates

Question 17

Forward rates are future __________

Answer 17

Spot rates

Question 18

What is meant by arbitrage?

Answer 18

Ability to make riskless profits due to mispricing between assets

Question 19

What do you mean by the ‘term structure of interest rates’?

Answer 19

The relationship between yields and time to maturity of fixed income securities issued, mainly by governments

Question 20

What are the 4 shapes yield curves can take?

Answer 20

Flat, rising, inverted, hump-shaped

Question 21

What are 3 theories that have been put forward to explain the different shapes of the yield curve?

Answer 21

Liquidity preference theory, expectations hypothesis, segmentation hypothesis

Question 22

There’s a _________ relationship between bond prices and int rates

Answer 22

Negative

Question 23

Duration of coupon bonds is always ________ the maturity

Answer 23

Lower

Question 24

Duration of zeros will always be _______ the maturity

Answer 24

Equal to

Question 25

Modified duration always ____ price falls and _________ price increases

Answer 25

Overestimates, underestimates

Question 26

What is ‘Horizon return’

Answer 26

Return realized for the period that the bond is held