CHapter 7 Flashcards
the stated interest payment made on a bond
coupon
the principal amount of a bond that is repaid at the end of the term
face value / par value
(assume $1000 unless specifically told otherwise)
the annual coupon divided by the face value of a bond
coupon rate
the specified date on which the principal amount of a bond is paid
maturity
are debt securities
- we will use this tem generically to refer to long term debt
bonds
the coupon is a
dollar amount
the coupon rate is
annual
are effectively interest only loans
bonds
(no principal repayment is made until redemption)
the rate required in the market on a bond
yield to maturity (YTM)
when the bond price is less than the face value / par value
discount bond
YTM > coupon rate
discount bond
when the bond price is more than the face value / par value
premium bond
YTM < coupon rate
Premium bond
bond value =
bond value =
present value of the coupons + present value of the face amount
bond prices and interest rates have an _____ relationship
inverse
if the yield to maturity on a bond increases, then the price of the bond will
decrease
if th yield to maturity on a bond decreases, then the price of the bond will
increase
if YTM > coupon rate then bond price is __ par value
bond price < par value
(discount bond)
if YTM < coupon rate then the bond price is __ par value
bond price > par value
(premium bond)
the risk that arises for bond owners from fluctuating interest rates
interest rate risk / maturity risk
the longer the time to maturity the _____ the interest rate risk
the greater
the lower the coupon rate the _____ the interest risk
greater
a bonds annual coupon divided by its price
current yield
- only considers the coupon portion of your return
- does not factor in time
current yield