chapter 6

Question 1

what is the maturity date?

Answer 1

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

Question 2

what is the term of a bond?

Answer 2

the amount of time remaining before bonds maturity date

Question 3

what are coupons?

Answer 3

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

Question 4

what is the face value of a bond?

Answer 4

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

Question 5

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

Answer 5

1000 dollars

Question 6

what is the coupon rate of a bond?

Answer 6

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

Question 7

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

Answer 7

the coupon rate times the face value of the bond

Question 8

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

Answer 8

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

Question 9

what are zero-coupon bonds?

Answer 9

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

Question 10

what prices to zero-coupon bonds trade at?

Answer 10

they always trade less than their face value

Question 11

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

Answer 11

yes due to the law of one price

Question 12

how is YTM normally stated?

Answer 12

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

Question 13

is there is difference of YTM and the coupon rate?

Answer 13

yes

Question 14

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

Answer 14

at a discount
at a premium
at par

Question 15

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

Answer 15

the price of the bond is lower than its face value

Question 16

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

Answer 16

the price of the bond is higher than its face value

Question 17

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

Answer 17

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

Question 18

why do bond prices change through out time?

Answer 18

because interest rates and time to maturity changes as time passed

Question 19

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

Answer 19

the yield to maturity is more than the coupon rate

Question 20

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

Answer 20

the yield to maturity is less than the coupon rate

Question 21

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

Answer 21

the yield to maturity is equal to its coupon rate

Question 22

what causes the price of a coupon bond to change?

Answer 22

when the time to maturity changes and as interest rates changes

Question 23

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

Answer 23

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

Question 24

what causes the price of a coupon bond to increase?

Answer 24

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

Question 25

why do interest rates impact the price of bonds?

Answer 25

because it changes the rate at which it is discounted by

Question 26

when interest rates rise how does that impact bond prices?

Answer 26

bond prices will fall

Question 27

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

Answer 27

bond prices will rise

Question 28

how does a high yield to maturity impact bond prices?

Answer 28

it reduces the price of the bond

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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

Question 31

what are corporate bonds?

Answer 31

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

Question 32

what is credit risk?

Answer 32

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

Question 33

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

Answer 33

a bond with credit risk will have a higher yield

Question 34

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

Answer 34

they are inversely related

Question 35

what are investment-grade bonds?

Answer 35

bonds with low default risk

Question 36

what are junk bonds / high-yield bonds?

Answer 36

bonds with high default risk

Question 37

what is default spread/ credit spread?

Answer 37

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

Question 38

what causes credit spread to fluctuate?

Answer 38

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

Question 39

what are sovereign bonds?

Answer 39

bonds that are issued by national governments

Question 40

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

Answer 40

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