class 4 Flashcards
what is the risk structure of interest rates?
the relationships among interest rates on bonds with the same term to maturity
what is the term structure of interest rates?
the relationship among interest rates on bonds with different terms to maturity
what is a term?
the horizon of an investment or loan
do bond yields differ across bonds with similar maturity?
yes
what are the 3 factors that affect bond yield?
risk default
liquidity
tax considerations
over time how have the prices of federal bonds, provincial bonds and corporate bonds ranked in price and interest rate?
federal bonds normally have high price and low interest rate
provincial bonds normally have higher prices and lower interest rates than corporate bonds but not the same as federal bonds
corporate bonds normally have lower prices with higher interest rates
what is default risk?
the probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value
are government of canada bonds considered default free bonds?
yes
what is risk premium?
the spread between the interest rate on bonds with default risk and the interest rates on same maturity Canada bonds
what are credit rating agencies?
agencies that assess and grade bond risk
what grades are investment grade bonds?
bonds with ratings AAA to BBB (Baa)
what grades are speculative bonds (junk bonds or high-yield bonds)?
bonds with ratings of BBB (Baa) or below
what is liquidity?
the ease with which an asset can be converted into cash
what are the 2 things that liquidity depends on?
cost of selling a bond
number of buyers/ sellers in a bond market
what are tax considerations?
wither a the interest payments of a bond is taxed or not, in the states interest payments on municipal bonds are. exempt from federal income taxes and in Canada they are taxed
how could risk of default impact the bonds yield?
if the risk is higher on a bond the price will be lower and the interest rate will be higher and vice versa for lower risk bonds
how could liquidity impact the bonds yield?
if it it hard to sell bonds and the liquidity is low than the interest rate would have to be higher to attract customers and vice versa for a easily liquid bond
how could tax considerations impact the bonds yield?
if the interest payments are taxed the interest rate would have to be higher to make up for the loss to attract people to buy it
what does risk structure of bonds look at?
they look at multiple bonds with the same maturity at different risk and interest rates
what is yield curve?
a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations
(the relationship between the term of the bond and the yield to maturity)
what are the 3 kinds of yield curves?
upward sloping
flat
inverted
explain an upward sloping yield curve?
longterm rates (higher yield) are above short-term rates (less yield)
explain a flat yield curve?
short and long term rates are the same
explain an inverted yield curve?
longterm rates are below (less yield) short-term rates (higher yield)