chapter 2 Flashcards
Bond par value
always assume par value is $1,000 in the bond unless told otherwise in the question
Bond Quote
for bonds with par value of 1K when converting quote to a price, multiply by 10, bond with a quote pf 97 is worth $970
When a bond matters
investors receive the principal ( usually 1K) plus their final semiannual coupon payment. Note that this interest is calculated based off the bond’s par value, not the market price at which it was purchased
Bond call feature
an issuer will call a bond when interest rates decline, if an issuer chooses to call away the bond because of declining interest rates, bondholders will receive par value, their final semiannual coupon payment, and of applicable, a call premium.
callable bonds generally pay a higher rate than non-callable bonds due to their risk, a call feature benefits the issuer, not the investor
some bonds have a put feature, where investors can demand early repayment of principal-they would exercise this if interest rates increased. put bonds generally pay a lower rate
Yield to call
a bond’s yield to call is calculated using the first date on which the issuer would call the bond.
bond at discount: YTC>YTM>CY>NY (coupon)
bond at premium: YTC<YTM<CY<NY ( coupon)
YTM vs coupon Rate
if an investors buys a bond with a YTM > NY, the bond is trading at a discount, if YTM< NY, the bond is trading at a premium
Interest rate risk
the risk that as interest rates increase, bond prices will decrease
given a change in interest rate, long-term bonds are more volatile then short term bonds, and low- coupon bonds ( including zero-coupon bonds) are more volatile than high- coupon bonds
reinvestment risk
call risk leads to reinvestment risk, which is that no available investment will be able to provide a similar return as your former bond that has just been called
zero-coupon bonds do not have reinvestment risk because, since they do not pay a coupon, there is no interest to reinvest
accrued interest
calculates how much interest goes to the seller and the buyer when the bond is sold between interest payment dates.
CORPORATE/MUNICIPAL/AGENCY BONDS: calculated 360 days, 30 days in a month, with T+2 regular way settlement
T-NOTES/T-BONDS: 365 days in a year, with actual-day months, with (+) regular way settlement
number of days of accrued is calculating beginning of the last coupon date including that date and UP TO, BUT NOT INCLUDING, the settlement date
trading flat
a term that means the bond is not trading with accrued interest, this would occur if . . .
- the settlement date coincided with the interest payment date
-if the settlement date coincided with the dated date
-the bond is in default
-it was a zero coupon bond
bond
a security issued by a corporation or governmental entity to raise capital, representing a loan to a borrower in return for payment of interest and principal to lender
yield to maturity (YTM)
the most widely quoted rate of return on a bond, accounting for not only the interest payments received by the investor, but also the difference between their purchase price and the amount of principal received at maturity
