Chapter 5 - Bonds Flashcards
What is a bond?
A Borrowing from the public, individuals will lend an amount and the business repays the full amount while paying regular interest payments along the way.
Components of a bond:
Face Value: Principal amount, FV
Maturity Date: t
Coupon Rate: The interest rate, r
Coupon Payment: bonds interest payments,C
YTM: Yeild to maturity, interest rate on a bond required in the market. Can be seen as the market interest rate.
Figure out the coupon payment:
FV x Coupon Rate
Coupon Rate:
C/ FV
BOND Equation is made up of
PV of an annuity and PV Lump sum
Collateral Bonds
Bond is secured by a physical asset
Debentures
In NZ and Australia, these are secured and have a greater level of security.
Bond Seniority
Where a bond ranks in comparison to other bonds, a senior bond will be paid before a junior bond.
Bond Indenture
A legal document binding the bondholders and a company . Provides info surrounding the bond and also protects the bond holders.
If Coupon rate is less than YTM
It is priced at a DISCOUNT
If coupon rate equals YTM
It is priced at Par Value
If Coupon rate is bigger than YTM
It is priced at a Premium.
How to calculate CR
C/FV
Two factors that influence interest rate risk:
- Maturity of the bond - longer they are, worse they are
- Coupon rate of the bond - lower it is, worse it is
Nominal Interest Rate
Rate that accounts for inflation
