chapter 6: bond valuation and interest rates part 2 Flashcards

1
Q

are interest rates inversely related to bond prices?

A

yes

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2
Q

when bond prices increase what happens to interest rates?

A

interest rates decrease

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3
Q

when bond prices decrease what happens to interest rates?

A

interest rates increase

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4
Q

what are the factors affecting bond prices

A

the relationship between the coupon rate and bond’s yield to maturity (YTM) determines if a bond will sell at a

  1. premium
  2. discount or
  3. at par
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5
Q

if the coupon rate is greater than YTM

A

the price will be greater than face value

= discount

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6
Q

if the coupon rate = YTM

A

price will = Face value

at par

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7
Q

if the coupon rate is less than YTM

A

price is less than face value

premium

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8
Q

what are the factors affecting bond prices

A

1 . YTM

  1. time to maturity
  2. size of coupon
  3. interest rate risk and duration
    - –
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9
Q

what affects to volatility of a bond

A

time to maturity and size of the coupon

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10
Q

when bond prices increase what happens to YTM

A

YTM decreases

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11
Q

when bond prices decrease what happens to YTM

A

YTM increases

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12
Q

what is the price-YTM relationship

A

it is convex

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13
Q

because the price -YTM relationship is convex, the price ….

A

rise due to a fall in YTM is greater than the price decline due to a rise in YTM given an identical change in YTM

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14
Q

for a given change in YTM, bond prices will change more when

A

interest rates are low than when they are high

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15
Q

what is volatility

A

Volatility is the pace at which prices move higher or lower,

Commonly, the higher the volatility, the riskier the security.

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16
Q

when speaking about time to maturity, which maturity bonds have a greater price volatility (long-maturity or short maturity)

A

long-maturity bonds

the longer the bond, the longer the period for which the cash flows are fixed

17
Q

how does the size of the coupon affect the bond prices

A

low coupon bonds - have greater price volatility than higher coupon bonds

18
Q

why are high coupon bonds les volatile than low coupon bonds

A

because they act like a stabilizing device
- since a greater proportion of the bond’s total cash flows occur closer to today and are therefore their present value is less affected by a change in YTM

19
Q

the sensitivity of a bond’s price to change in interest rates is a measure of what

A

of the bond’s interest rate risk

20
Q

interest rate risk is affected by what

A
  1. YTM
  2. term to maturity
  3. size of coupon
21
Q

duration measure of interest rate risk

A
  1. as a change in price for a given change in interest rate

2. the higher the bond’s duration, the more sensitive its price is to changes in interest rates

22
Q

a bond’s duration will be higher if its …….

A

YTM is lower
term to maturity is longer
coupon is lower

23
Q

what is the quoted price

A

the price reported by the media

24
Q

what is the cash price

A

the price paid by an investor, and includes both

1. the quoted price plus any interest that has accrued since the last coupon payment date

25
what is the YTM
it is the discount rate used for bond valuation
26
YTM is the yield an investor would earn if
1. she purchases the bond at the current market price 2. she holds the bond to maturity 3. she reinvests all the coupons paid by the bond at the YTM
27
what is IRR
internal rate of return which is the YTM
28
ytm is therefore the bond's
internal rate of return IRR
29
YTm is also the
discount rate that causes the PV of the bond's future cash flows to equal its current price
30
how do you solve YTM
(2nd) (CLRTVM) 30 (PMT) - 1030 (PV) 1000 (FV) 40 (N) (CPT) (I/Y) = then multiply by 2 to annualize
31
why do you enter the price as a negative number
because it is a cash outflow to purchase the bond
32
why do you enter the coupon and principal payments as positive numbers
these are cash inflows