chapter 5 bonds Flashcards
what is a bond?
a debt instrument whereby an investor lends money to an entity (such as a company or a government) that borrows the funds for a defined period of time at a fixed interest rate
what is the main reason for issuing bonds?
for the issuer to raise finance, perhaps to fund something in particular
what are the three major ways for a company to raise finance?
- bonds
- bank loans
- equity issues
what are the two major groups of bond issuers?
companies and governments
what are bonds issued by companies known as?
corporate bonds
what is the nominal value?
the amount that is owed by the bond issuer, and that will be repaid on the repayment date
what is another term for the nominal value?
face value or par value
what is the repayment date?
when the money will be returned
what does it mean for bonds to be ‘tradeable’?
bonds can be sold before they reach their repayment date
what would happen to the bond price if interest rates in the economy increased?
- the required yield would increase
- so the bond price would fall so that the yield it provides the buyer is competitive
what is the flat yield?
when the yield calculation includes only the calculation of coupon divided by price
what is the relationship between yield and bond prices?
inverse relationship - if required yields increase, bond prices decrease and vice versa
what is the yield of a bond being priced at face value?
the same as the coupon
why are bond prices susceptible to movements in general interest rates?
for their yield to be attractive to an investor it needs to remain competitive with the return available on alternative investments
what are the advantages of investing in bonds?
- predictable income in the form of regular, fixed coupons
- fixed date and amount to be repaid at redemption
