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
Real Interest Rate
What investors receive without being adjusted for inflation
Investment grade Bonds
High Credit ratings
Speculative grade bonds
Low Credit Ratings
Change in price in bonds
Calc Initial price, calc New price and then do new-old/old.
