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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

A
25
Q

What can we do to lower interest rate risk

A
  1. low/short times to maturity (buy bonds closer to maturity)
  2. only buy coupons with higher rates:
    -higher coupons help lower risk
26
Q

Slide 7-118 problem

A

n= 15
i/y= ?
pv= 928.09
fv= 1000
pmt=-10%*1000

27
Q

If a bond is trading at < 100% of par,

A

the market interest rate is higher than the coupon rate of the bond

28
Q

Why would some businesses want to pay more interest? doesnt this reduce earnings?

A

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
Q

What do common shareholders do?

A

vote for the board of directors

board of directors are managers

30
Q

Why are dividends not tax deductible

A

because it is a CHOICE!!! companies are not required to pay divdends like tehy are requried to pay investors

31
Q

Bonds dont have votes, bonds have //////

A

indenturesw

32
Q

What does the bond indenture state

A

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
Q

missed some slides

A

7-177 pick up

34
Q

What is a callable bond

A

can be bought back prior to maturity

35
Q

7-189

A
36
Q
A
37
Q

7.7 (STARTING HERE) What interest rate should we want?

A

this is based on the term structure of interest rates

38
Q

What is the term structure of interest rates?

A

relationship between time to maturity and yields, all else equal

39
Q

What is an upward sloping yield curve

A

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
Q

Downward sloping yield curve
-why does this happen

A

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
Q

What are downard sloping yield curves and upward slopin yield curves examples of

A

term structure of interest rates

42
Q

What are risks on Government bonds?

A

-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
Q

what causes upward sloping term structure

A

when interest rate risk premium» inflation risk premium

44
Q

What causes downard sloping term structure

A

when interest rate risk premium&laquo_space;inflation risk premium

45
Q

what deterimes what government of canada (the safest bonds) must pay?

A

a real return

compensation for int. rate risk

compensation for inflation risk

46
Q

what determines what corporations issuing bonds must pay?

A

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
Q

What is the price of a bond

A

PV

48
Q

What is the yield of a bond

A

I/Y

49
Q

As interest rates go up then bond prices will fall

A
50
Q
A

FNCE317 (21 decks)

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