chapt 6 risk,liquidity and bond features Flashcards
the greater the default risk,
the higher the required YTM
the less liquid the bond
the higher the required YTM
call features generally increase
the YTM
extendable bonds generally
have lower required YTMs
retractable bonds generally have
lower required YTM
what are soverign debt ratings
see pg 230
what are liquidity premiums
see pg 232 - 233
what are some other types of bonds
treasury bills
what are treasury bills
short-term obligatons of the gov with an intial term to maturity of 1 year or less
- issued at a discount to face value with face value being paid at maturity
what is the difference b/w face value - discounted issue price
= interst income
what are zero coupon bonds
does not make regular interest payments
- issued at a discount
- repays at maturity, the par value
- since no coupons are paid, there is no reinvestment rate risk
- commonly interest and principal are sold separately
if market rates fall, price of a zero coupon bond would
increase and vice versa
zeros are more sensitive to
interest rate changes because they don’t make any coupon payments
what are floating rate bonds
have coupon rates that float with some reference rate, such as yield on T-bills
- since it floats, or is vairavle, the market price will typicall be close to the bond’s face value
what are real return bonds
isused by the gov. of Canada
- to protect investors against unexpected inflation
- each period, the face value is grossed up by the inflation rate
- coupon is paid on the grossed up face value
