Ch 6 - Bonds Flashcards
What is par value in bonds?
aka - face value
sum of money that the corp promises to pay at bond’s expiration
-usually also the amt the bondholder gives to the corp in the beginning
What is coupon rate in bonds?
the interest rate of the bond
-aka coupon yield
What is maturity in bonds?
the number of years from when bond is issued to when it expires
what type of debt capital financing involves a fixed coupon payment at fixed intervals and payment of par value at maturity?
bonds
what is bond indenture?
bond contract between bond issuer (corp) and bondholder (investory) and describes all of bond’s features (coupon rate, par value, maturity, covennts
What are a bond’s covenants
outline things the company is obligating itself to do or not do in order to protect bondholders
What are the two types of bond covenants?
affirmative (things company pledges to do)
negative (things company pledges not to do)
How does a company stand in default of a bond?
by not following the stated covenants of the bond
What is debt capital?
firm financings that appear in the debt section of the balance sheet
what are the two types of cash flows from a bond?
- coupon payment stream (annuity)
2. par (face) value repayment (lump sum)
What are the two types of bond questions?
- given the discount rate, find market price
2. given market price, find discount rate (aka yield to maturity)
What is yield to maturity (YTM) or promised yield?
average annual rate of return that investors require to receive on a bond if held to maturity
aka - bond’s discount rate
What are three measures of bond yield?
- coupon yield coupon rate)
- yield to maturity
- current yield
What happens when a bond sells at a discount?
the YTM will always be higher than coupon yield because investors receive coupon payments that make up coupon yield but also tie increase in price over time
what is the inverse price-yield relationship?
when you buy the bond at less than face value ( a discount) and you still get a higher yield because you get paid the face value in the end plus the coupon payments
what is duration?
measure of the interest rate sensitivity of a bond
What happens if the coupon rate is greater than the discount rate?
the bond will sell for a premium
(the market rate is lower than the coupon pmt rate
As market yields go up, what happens to the price of existing bonds?
The price of the existing bonds decreases (sells at a discount) in order to stay competitive with newly released bonds that are selling at a higher yield for same years to maturity
As market yields (interest rates) fall, what happens to price of existing bonds?
The price of bonds will go up, this is because the bond can sell at a premium. The bond now pays at higher rates.
If the coupon rate is lower than the discount rate, what happens to the selling price of the bond
bond sells at lower price, is discount
If the coupon rate is higher than the discount rate, what happens to the selling price of the bond
the bond sells at a higher rate, a premium
T or F – As the coupon rate increases, the bond price will increase.
True – Bond prices are calculated by taking the present value of the coupons and face value of bonds. If the coupons are larger, the present value of the coupons will also be larger. Therefore, price of the bond will be higher.
T or F: A bond w/longer time to maturity will have less sensitivity to changes in interest rates.
False: bonds w/ longer times to maturity have more sensitivity
T or F - Bond A has 20 yrs to maturity while bond B has 5 yrs to maturity. If interest rates increase, then price of Bond A will decrease more than price of Bond B.
True - bonds w/ loner times to maturity are more sensitive to changes in interest rates
