chapter 6 Flashcards
what is the maturity date?
the date that the final payment of face value will be payed out
what is the term of a bond?
the amount of time remaining before bonds maturity date
what are coupons?
the promised interest payments that are paid periodically until the maturity date of the bond
what is the face value of a bond?
the value that is used to calculate coupon payments and is usually paid out at the maturity date
what is the common face value we use in this class?
1000 dollars
what is the coupon rate of a bond?
the rate is used to determine the coupon payments of the bond
how do you figure out the coupon payments of a bond?
the coupon rate times the face value of the bond
if the bond pays its coupons semi-annually, how would you find the coupon?
the coupon rate times the face value of the bond divided by 2
what are zero-coupon bonds?
a bond that does not make coupon payments and the only payment is the face value of the bond received at maturity
what prices to zero-coupon bonds trade at?
they always trade less than their face value
if a zero-coupon bond is risk free, is the yield to maturity of the bond equal to the risk free rate of interest?
yes due to the law of one price
how is YTM normally stated?
as an APR with the same compounding periods with the same compounding intervals as the coupon rate
is there is difference of YTM and the coupon rate?
yes
what are the 3 different kinds of prices that bonds can trade at?
at a discount
at a premium
at par
what does it mean when a bond is trading at a discount?
the price of the bond is lower than its face value
what does it mean when a bond is trading at a premium?
the price of the bond is higher than its face value
what does it mean when a bond is trading at par?
the price of the bond is the same as its face value
why do bond prices change through out time?
because interest rates and time to maturity changes as time passed
if a bond trades at a discount, how does that impact yield to maturity and its coupon rate?
the yield to maturity is more than the coupon rate
if a bond trades at a premium, how does that impact yield to maturity and its coupon rate?
the yield to maturity is less than the coupon rate
if a bond trades at par, how does that impact yield to maturity and its coupon rate?
the yield to maturity is equal to its coupon rate
what causes the price of a coupon bond to change?
when the time to maturity changes and as interest rates changes
what causes the price of a zero-coupon bond to change?
when the time to maturity decreases the price of the bond increases
what causes the price of a coupon bond to increase?
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
why do interest rates impact the price of bonds?
because it changes the rate at which it is discounted by
when interest rates rise how does that impact bond prices?
bond prices will fall
when interest rates fall, how does that impact bond prices?
bond prices will rise
how does a high yield to maturity impact bond prices?
it reduces the price of the bond
are shorter maturity zero-coupon bonds or longer-maturity zero-coupon bonds more sensitive to changes in interest rate?
shorter-maturity bonds are less sensitive than longer-term bonds are because you are discounting less cashflows
are bonds with higher coupon rates or bonds with lower coupon rates more sensitive to interest rate changes?
lower coupon rate bonds are more sensitive than higher coupon rate bonds
what are corporate bonds?
bonds that are issued by corporations and have a higher possibility that the issuer will default
what is credit risk?
the risk that the issuers of a bond will default on the bond
will the yield of a bond with credit risk have a higher yield or will a risk free bond have higher yield?
a bond with credit risk will have a higher yield
how are prices of a bond and and bond yields related?
they are inversely related
what are investment-grade bonds?
bonds with low default risk
what are junk bonds / high-yield bonds?
bonds with high default risk
what is default spread/ credit spread?
the difference between the yield of various bonds and the government of Canada bond yields
what causes credit spread to fluctuate?
as perceptions of the probability of default change, typically during crisis or recessions
what are sovereign bonds?
bonds that are issued by national governments
what is the risk that you are exposed to when purchasing sovereign bonds of other countries?
you are exposed to currency risk in addition to default risk, these both affect the bonds yield and prices
