Chapter 7

Question 1

What are the two streams of cash flows bonds generate?

Answer 1

Regular coupons and bond principal at maturity.

Question 2

Coupons are valued using what formula?

Answer 2

Regular annuity formula.

Question 3

Bond principal is discounted with what formula?

Answer 3

Present value — future value formula:
PVbond = Coupon1/r * [1-1/(1+r)^T] + face value/(1+r)^T

Question 4

Each bond is characterized by 5 parameters:

Answer 4

1. coupon rate
2. yield-to-maturity
3. tenor
4. face value
5. price (PV)

Question 5

What is the coupon rate?

Answer 5

Promised annual rate of interest, interest is usually paid semi-annually.

Question 6

What is the yield to maturity?

Answer 6

Market interest rate for bonds quoted as annual percentage rate with m=2 for corporate bonds paying semi-annual coupons.

Question 7

What is tenor?

Answer 7

Time remaining until the bonds maturity date expressed in number of coupon payments.

Question 8

What is face value?

Answer 8

Notional value of the bond paid to bondholders at maturity ($1,000).

Question 9

When interest rates go up, bond prices _______

Answer 9

drop

Question 10

when bonds are traded above face value they are ___

Answer 10

traded at premium

Question 11

when coupon rate equals YTM

Answer 11

bonds are traded at par

Question 12

when yields are above the coupon rate

Answer 12

bonds are traded at a discount

Question 13

What is a yield curve?

Answer 13

It describes yields on bonds with different maturities, but equal credit quality.