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FNCE317 > Ch 7- Class Notes > Flashcards

Ch 7- Class Notes Flashcards

1
Q

What is a Bond

A

An IOU for a company/govt

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2
Q

What is par value

A

the face value of the bond, or the amount that you pay for –

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3
Q

What is the coupon rate

A
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4
Q

What is the couponn payment

A

How much you get paid when its time to get paid

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5
Q

What is the maturity date

A

When the bond expires and you get og price back + the coupon payment for the period

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6
Q

What is the yield or yield to maturity

A
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7
Q

A lot of bonds payment goes back to paper! These bonds used to be paper and basically every coupon on the bond is fixed at the time of printing! So when it was itme to recivie your payment, you would rip it off and hand it in to the bank!

A

The bank would you give you your coupon payment in exchange for the thing

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8
Q

What is the bond value formula?

A

PV of coupons + PV of face

or

PV annuity + PV of lump sum payment

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9
Q

How to do bonds in the calculator?

A

PMT= positive
FV= the face value SHOULD BE POSITIVE
N= coupon count (how many coupons do you have, or how many times will you get paid)
I/Y= interest rate per period (YIELD TO MATURITY!! NOT COUPON RATE)
PV= -( coupon rate x par value)

NOTE: PMT and FV can have negative signs when PV has a positive sign but THESE MUST BOTH ALWAYS BE THE SAME SIGN!!!!!!

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10
Q

Bond values decrease as interest rates go up!

A

When interest rate is low, bond value is high

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11
Q

Some people buy bonds when they think interest rate is going to go up!

A
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12
Q

if they dont tell you the par valu`e?

A

then assume it is 1000

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13
Q

most of the bonds we get are end bonds, os never press the begin unless you are sure

A
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14
Q

At par the coupon rate = yield rate

A

!!!!!!!!!11

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15
Q

If you take the issuers perseppctive on a bond

A

you are going into debt and OWE interest payments
FV= -
PMT= -
PV= +

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16
Q

IF YTM= coupon rate then

par value ?? bond price

A

=

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17
Q

If YTM > coupon rate, then

par value ?? bond price

A

>

Because coupons are not enough, we need to discount the future valeu so the bond will sell below par

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18
Q

If YTM < coupon rate, then

par value ?? bond price

A

<

Basically, the coupons you are paying ur buyers the coupons you have look reallllllllllly good!! so the bond will sell above par

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19
Q

What does Yield to Maturity mean

A

This is describing the state of the world and the general market

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20
Q

Bond= value of coupon annuity + discounted future value

A
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21
Q

How often do bonds pay?

A

mostly semi-annually bc a full year is a long wait and monthly payments would have too much admin costs

22
Q

What does 8% semiannual-pay bonds look like?

what is n?

A

4% is paid ever 6 mos

n= # of half years

23
Q

What does interest rate risk come from

A

fluctuating interest rates

24
Q

what 2 things determine how sensitive a bond will be to interest rate risk

25
What can we do to lower interest rate risk
1. low/short times to maturity (buy bonds closer to maturity) 2. only buy coupons with higher rates: -higher coupons help lower risk
26
Slide 7-118 problem
n= 15 i/y= ? pv= 928.09 fv= 1000 pmt=-10%*1000
27
If a bond is trading at < 100% of par,
the market interest rate is higher than the coupon rate of the bond
28
Why would some businesses want to pay more interest? doesnt this reduce earnings?
YES! think about it like this EBIT -Interest EBT -Tax Net Income If you pay more interest, money is going to bond holders More interest= less tax This lowers earnings but this means that all the money from interest and the money from net income goes to investors (bond ohlders and share holders)
29
What do common shareholders do?
vote for the board of directors board of directors are managers
30
Why are dividends not tax deductible
because it is a CHOICE!!! companies are not required to pay divdends like tehy are requried to pay investors
31
Bonds dont have votes, bonds have //////
indenturesw
32
What does the bond indenture state
the basic terms of the bond the total amount of bonds issued a description of porety used as security if applicable sinking fund provisions
33
missed some slides
7-177 pick up
34
What is a callable bond
can be bought back prior to maturity
35
7-189
36
37
7.7 (STARTING HERE) What interest rate should we want?
this is based on the term structure of interest rates
38
What is the term structure of interest rates?
relationship between time to maturity and yields, all else equal
39
What is an upward sloping yield curve
the more you're willing to lock in your debt, the higher the interest rate you will get! if you are willing to put away your money for 5y you will get 4% yield as oppposed to 3 mos you will get 0.5% yield curve
40
Downward sloping yield curve -why does this happen
If you put away your money for a short term, you will get higher yield return (3 mos= 4.5%, 5 yrs= 0.5%) this happens because the govt believes that the market will get worse in the long term so they will be able to pay less for yields
41
What are downard sloping yield curves and upward slopin yield curves examples of
term structure of interest rates
42
What are risks on Government bonds?
-you're not worried that govt wont pay, they def will, but there are 2 risks you're worried about -INFLATION RISK PREMIUM: if inflation increases ur money loses value - INTEREST RATE RISK PREMIUM: if interest rate goes up then bond prices will fall Both of these risks cause upward sloping/downward sloping term structure
43
what causes upward sloping term structure
when interest rate risk premium>> inflation risk premium
44
What causes downard sloping term structure
when interest rate risk premium<< inflation risk premium
45
what deterimes what government of canada (the safest bonds) must pay?
a real return compensation for int. rate risk compensation for inflation risk
46
what determines what corporations issuing bonds must pay?
real return comp for int rate risk comp for inflation risk defaultl risk premium (company might go bankrupt) liquidity premium (ability to sell the bonds if and when we want to) + anything else that afffects the risk to the bondholder
47
What is the price of a bond
PV
48
What is the yield of a bond
I/Y
49
As interest rates go up then bond prices will fall
50

FNCE317 (21 decks)

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