Chapter 7 Flashcards
What is a bond?
Interest-only loan with principal repaid at the end of the loan term (at maturity).
What is Per value or face value?
The principal amount repaid at maturity (bond that sells for its par value/face value is said to sold ‘at par’).
What is a Coupon?
Regular interest payments.
What is a Coupon rate?
The stated interest rate on the bond.
What is the Maturity date?
The specified date at which the face value of the bond is paid.
What is the Yield or Yield to maturity?
Interest rate required in the market on a bond is the market rate.
What happens to bond prices when interest rates increase and vice versa?
Bond prices decrease and vice versa.
If YTM is equal to the coupon rate, how will the bond sell?
Bond will sell at par value.
If YTM is greater than the coupon rate, how will the bond sell?
Bond will sell at a discount.
If YTM is smaller than the coupon rate, how will the bond sell?
Bond will sell at a premium.
How often are coupon payments made in Canada?
Semiannually.
What is an interest rate risk?
Risk depends on how sensitive the bond price is to interest rate changes.
What is the nominal rate of interest?
Percentage change in the number of dollars that you have.
What is the real rate of interest?
percentage change in the buying power of your dollars
What is the Fisher effect?
The relationship between real rates, nominal rates, and inflation. The exact relationship is (1 + R) = (1 + r)(1 + h)
