Chapter 10: Bonds, property and equity

Question 1

Term of a bond

Answer 1

Length of time until the maturity date

Question 2

fixed-interest bonds

Answer 2

Amount of each coupon payment is fixed for the term of the bond

Question 3

Coupon payments

Answer 3

The coupon rate is specified in the documentation
Usually paid half-yearly but can be annually, quarterly or monthly
Usually in arrears (ie at the end of the period), assume so unless otherly specified
Zero for zero-coupon bonds
Related to the nominal value

Question 4

Nominal value of a bond

Answer 4

Or par/face value
Shows the size of the holding
Normally £100

Question 5

(redemption) yield

Answer 5

the interest rate used to calculate the equation of value for a bond. This is the rate of return.

For fixed interest bonds the equation of value is:
Price = PV of coupons + PV of redemption payment

Overall RoR from investing in a bond

Question 6

If the redemption yield goes up, what happens to the price of the bond?

Answer 6

The price falls

Question 7

Running yield

Answer 7

for fixed interest bonds:
annual coupon amount/bond price

for property
annual rental income/property price

A measure of how much of the return on the bond is generated by the payment of the annual coupon alone

Question 8

Calculating the theoretical price of a property

Answer 8

if assuming not sold also assume rent will last forever

Price=PV of future rental income + PV of sale price

Normally assume that the rent increases over time