Chapter 7: Fixed Income Securities - Features and Types

Question 1

what is a bond’s fair or theoretical price

Answer 1

the pv of its cash flows

Question 2

what is the discount rate on a bond

Answer 2

• the required rate of return
• the minimum return investors must expect to earn to be interested in buying a bond

Question 3

what are coupon payments

Answer 3

cash flows over time

Question 4

how do you calculate coupon payment

Answer 4

fv x coupon rate = annual coupon payment / time its paid (monthly, annually, semi annually, etc.)

Question 5

what is YTM

Answer 5

• yield to maturity
• like a discount rate
  (EAR instead of APR)
• tells you how much you earn if you hold onto a bond until maturity
• includes how much you earn from the interest payments and the initial principal