chapter 6 Flashcards

1
Q

what is the maturity date?

A

the date that the final payment of face value will be payed out

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2
Q

what is the term of a bond?

A

the amount of time remaining before bonds maturity date

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3
Q

what are coupons?

A

the promised interest payments that are paid periodically until the maturity date of the bond

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4
Q

what is the face value of a bond?

A

the value that is used to calculate coupon payments and is usually paid out at the maturity date

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5
Q

what is the common face value we use in this class?

A

1000 dollars

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6
Q

what is the coupon rate of a bond?

A

the rate is used to determine the coupon payments of the bond

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7
Q

how do you figure out the coupon payments of a bond?

A

the coupon rate times the face value of the bond

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8
Q

if the bond pays its coupons semi-annually, how would you find the coupon?

A

the coupon rate times the face value of the bond divided by 2

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9
Q

what are zero-coupon bonds?

A

a bond that does not make coupon payments and the only payment is the face value of the bond received at maturity

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10
Q

what prices to zero-coupon bonds trade at?

A

they always trade less than their face value

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11
Q

if a zero-coupon bond is risk free, is the yield to maturity of the bond equal to the risk free rate of interest?

A

yes due to the law of one price

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12
Q

how is YTM normally stated?

A

as an APR with the same compounding periods with the same compounding intervals as the coupon rate

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13
Q

is there is difference of YTM and the coupon rate?

A

yes

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14
Q

what are the 3 different kinds of prices that bonds can trade at?

A

at a discount
at a premium
at par

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15
Q

what does it mean when a bond is trading at a discount?

A

the price of the bond is lower than its face value

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16
Q

what does it mean when a bond is trading at a premium?

A

the price of the bond is higher than its face value

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17
Q

what does it mean when a bond is trading at par?

A

the price of the bond is the same as its face value

18
Q

why do bond prices change through out time?

A

because interest rates and time to maturity changes as time passed

19
Q

if a bond trades at a discount, how does that impact yield to maturity and its coupon rate?

A

the yield to maturity is more than the coupon rate

20
Q

if a bond trades at a premium, how does that impact yield to maturity and its coupon rate?

A

the yield to maturity is less than the coupon rate

21
Q

if a bond trades at par, how does that impact yield to maturity and its coupon rate?

A

the yield to maturity is equal to its coupon rate

22
Q

what causes the price of a coupon bond to change?

A

when the time to maturity changes and as interest rates changes

23
Q

what causes the price of a zero-coupon bond to change?

A

when the time to maturity decreases the price of the bond increases

24
Q

what causes the price of a coupon bond to increase?

A

as the time to maturity decreases and after each coupon is paid, because there is less cashflows to decrease and there is less time to decrease it by

25
Q

why do interest rates impact the price of bonds?

A

because it changes the rate at which it is discounted by

26
Q

when interest rates rise how does that impact bond prices?

A

bond prices will fall

27
Q

when interest rates fall, how does that impact bond prices?

A

bond prices will rise

28
Q

how does a high yield to maturity impact bond prices?

A

it reduces the price of the bond

29
Q

are shorter maturity zero-coupon bonds or longer-maturity zero-coupon bonds more sensitive to changes in interest rate?

A

shorter-maturity bonds are less sensitive than longer-term bonds are because you are discounting less cashflows

30
Q

are bonds with higher coupon rates or bonds with lower coupon rates more sensitive to interest rate changes?

A

lower coupon rate bonds are more sensitive than higher coupon rate bonds

31
Q

what are corporate bonds?

A

bonds that are issued by corporations and have a higher possibility that the issuer will default

32
Q

what is credit risk?

A

the risk that the issuers of a bond will default on the bond

33
Q

will the yield of a bond with credit risk have a higher yield or will a risk free bond have higher yield?

A

a bond with credit risk will have a higher yield

34
Q

how are prices of a bond and and bond yields related?

A

they are inversely related

35
Q

what are investment-grade bonds?

A

bonds with low default risk

36
Q

what are junk bonds / high-yield bonds?

A

bonds with high default risk

37
Q

what is default spread/ credit spread?

A

the difference between the yield of various bonds and the government of Canada bond yields

38
Q

what causes credit spread to fluctuate?

A

as perceptions of the probability of default change, typically during crisis or recessions

39
Q

what are sovereign bonds?

A

bonds that are issued by national governments

40
Q

what is the risk that you are exposed to when purchasing sovereign bonds of other countries?

A

you are exposed to currency risk in addition to default risk, these both affect the bonds yield and prices