Chapter 2

Question 1

Define YTM

Answer 1

The interest rate required in the market on a bond, so when future cash flows are discounted at this rate, it will yield a result equal to the price of the bond.

Question 2

What does it mean when a bond market is efficient

Answer 2

The present value of any bond is zero because in an efficient market what you pay should be equal to the pay-off you expect to get.

Question 3

What is the formula for the approximate YTM.

Answer 3

(Coupon +(Principal-Price)/Years to maturity ) / (Principal+Price/2). This is only used when trying to find ytm.

Question 4

If the coupon rate is the same as the YTM what does this mean.

Answer 4

Principal = Price of the bond

Question 5

What is the formula for working out the pv of a bond

Answer 5

[Coupon x (1-1/(1+ytm)^T)/ytm)] + principal/(1+ytm)^T

Question 6

What does it mean when a financial asset is fair.

Answer 6

Incorporates all available information about the asset so for now the price you pay is justified.

Question 7

What is the formula for spot rate

Answer 7

(1/Bt)^1/t -1

Where Bt is the price of zero coupon bond