Chapter 7: Fixed Income Securities: Pricing and Trading

Question 1

Fair or Theoretical bond price

Answer 1

PV of its cash flows

Question 2

The discount rate

Answer 2

required rate of return

The minimum return investors must expect to earn to be interested in buying the bond

Question 3

Coupon payments

Answer 3

cash flows over time

Question 4

Principal repayment

Answer 4

is made at maturity (the last point on the timeline)

Question 5

YTM assumes…

Answer 5

all cash flows are reinvested at the same rate

• It means that each coupon payment can be reinvested as it is received at the YTM
• The PV of the coupon payment doesn’t change as it is growing and being discounted at the same rate
• If coupons were reinvested at a rate different than the YTM, perhaps interest rates change over the life of the bond, the realized return will differ from YTM