Chpt 6 bonds, basic formula notes

Question 1

what is a coupon

Answer 1

bond interest rate fixed at issuance

Question 2

what does it mean by current

Answer 2

bond’s interest rate as a percentage of the current price of the bond

Question 3

what is yield to maturity mean

Answer 3

estimate of what an investor will receive if the bond is held to its maturity date

Question 4

what is the price of the bond for calculator purposes

Answer 4

it is the FV - shown as a negative

Question 5

what is the interest - coupon rate

Answer 5

-used to calculate the payment (PMT) - ex 1,000 par value bond based on 6% coupon rate, paid annually 1,000 x 6% = -60 PMT if it is paid semi-annually - divided it by 2 then multiply by 1,000

Question 6

What is the interest market rate

Answer 6

• used to calculate i/Y - annually 5% = 3 i/y - semi-annually .03 / 2 = 0.015 i/y ???

Question 7

How do you calculate the number of periods?

Answer 7

Annually - matures in 10 years 10 N semi-annually 10 x 2 = 20 N

Question 8

How do you calculate the Cash price of a Bond?

Answer 8

Quoted price + Accrued interest

Question 9

Estimating YTM - What is it

Answer 9

rate of return estimate don a bond if held until the end of its lifetime - expressed as an annual rate

Question 10

YTM for an annual paying bond

Answer 10

selling price -PV bond % ie 5% x 1,000 = 50 PMT face value or par value 1,000 FV number of periods N (CPT) (I/Y) = YTM %

Question 11

YTM for semi-annual paying bond

Answer 11

selling price = -PV PMT - bond % / 2 x 1,000 - shown as a positive number in calculator N - number of periods x 2 FV - face value at maturity

Question 12

Estimating Yield to call (YTC) what is it?

Answer 12

what the bond is worth at the call date?

Question 13

estimating YTC formula

Answer 13

PV - selling price, shown as a negative PMT - bond % (Semi annual / 2) x par value FV - call price N - years /2 for semi annual

Question 14

Deterime the price of T-Bills

Answer 14

P = price of T-Bill

F = Face value of T-bill

Kbey = quoted yield (use decimals not %)

N = number of days

Question 15

Estimating the Yield on a T-Bill

Answer 15

Kbey = F-P x 365

P n

Question 16

Zero coupon bonds - what are they

Question 17

estimating YTM on a zero coupon bond

Answer 17

PMT = 0

N x 2

FV = Face value

PV = selling price

CPT iy = ???? x 2 = YTM

Question 18

Estimating YTM on Zero Coupon Semi-Annual bonds

Answer 18

PMT = 0

N = years x 2

FV = Face value

I/Y = Market yeild / 2

CPT PV = - YTM

Question 19

Internal Rate of Return Partity (IRP) - What is it

Question 20

Calclauting the internal rate of return parity

Answer 20

F = s x _(1 + k domestic) _

        (1 + K foreign) 

F = forward exchange rate for 1 year

S = ie lb = (1.75 Canadian 1.75 = s

K domestic = T Bill % interst rate in Canada

K foreign = T Bill % interst rate in other Country

Question 21

An arbitrage opportunity when IRP does not hold

Answer 21

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