Chapter 2

Question 1

What five developments could be identified in the last 30 years?

Answer 1

1. dramatic fall in both nominal and real yields
2. explosion of national debt worldwide
3. development of the emerging market, corporate and asset-backed bond markets
4. emergence and acceptance of bond derivates
5. conversion from pure passive investment to actively managed asset class

Question 2

Difference between primary bond markets and secondary bond markets

Answer 2

Primary bond market:
- Issuers first sell bonds to investors to raise capital

Secondary bond markets:
- Existing bonds are subsequently traded among investors

Question 3

bond issue in primary can sold via xx? (2)

Answer 3

1. Public offering (for any member of the public)
2. private placement (only for selected group of investors)

Question 4

Public Offerings: What Kind of offerings do exist?

Answer 4

1. Underwritten offerings
   - investment bank guarantees the sale of the bond at an offering price that is negotiated with the issuer
2. Best effort offerings
   - investment bank only serves as a broker
   - it only tries to sell the bond issue at the negotiated offering price if it is able to for a commission
3. Auctions
   - involves biddings

Question 5

There are two main ways for secondary markets to be structured. Which are they?

Answer 5

1. organized exchange
   - provides a place where buyers and sellers can meet to arrange their trades
   - buy or sell orders may come from anywhere, the transaction must take place at the exchange according to the rules imposed by the exchange
2. over-the-counter (OTC)
   - buy and sell orders initiated from various locations are matched through a communications networks

Question 6

What are sovereign bonds?

Answer 6

• bonds issued by national governments

In US:
- T-bills are one year or shorter
- T-Notes maturity between 1 - 10 years
- T-Bonds maturity of longer than 10 years

Question 7

Corporate Debt: What are the sources of debt capital for companies? (3)

Answer 7

1. Bank loans and syndicated loans
2. commercial papaer
3. corporate notes and bonds

Question 8

How should the bond price be?

Answer 8

Bond price should be equal to the value of all discounted future cash flows.

Question 9

What is the market discount rate?

Answer 9

The market discount rate is the rate of return required by investors given the risk of the investment in the bond.

Question 10

How do you call the different trades?
1. if the coupon rate is greater than the market discount rate
2. if the coupon rate is less than the market discount rate
3. if the coupons rate is equal to the market discount rate

Answer 10

1. traded at a premium
2. traded at a discount
3. traded at par

Question 11

What is the yield to maturity (YTM)?

Answer 11

• ## the internal rate of return on a bond’s cashflows

Question 12

of which two components do bond prices exist?

Answer 12

Flat (clean) price (Pc) + Accrued interest (AI) = Pf

Question 13

What are the 3 sources of return of a fixed-rate bond?

Answer 13

1. receipt of the promised coupon and principal payments on the scheduled dates
2. Reinvestment of coupon payments
3. potential capital gains or losses on the sale of the bond prior to maturity