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FIN 307 > Exam 3 - Chapter 10 [SLIDES] > Flashcards

Exam 3 - Chapter 10 [SLIDES] Flashcards

1
Q

Indenture

[important]

A

Is the contract between the issuer and the bond holder

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2
Q

Face or par value is typically $___

A

1000

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3
Q

Face or par value

A

The principal repaid at maturity

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4
Q

The _____ ____ determines the interest payamenet

A

Coupon rate

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5
Q

Interest is usually paid _____

A

Semiannually

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6
Q

The coupon rate can be ____

A

Zero

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7
Q

Interest payments are called “_______ _____”

A

Coupon payments

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8
Q

Covenants

A

Google

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9
Q

Not maturity is

A

1-10 years

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10
Q

Bond maturity is

A

10-30 years

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11
Q

Bonds and notes can be purchased directly from the ____

A

Treasury

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12
Q

Quoted price of 100:08 means

A

100 8/32 or 1002.50

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13
Q

30 second is

A

Face value

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14
Q

Quoted price needs to be converted into ____ price

A

Invoice

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15
Q

Corporate bonds

3 options he talked about (option features are added)

A
  1. Callable bond
  2. Convertible bond
  3. Puttable bonds
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16
Q

Callable bonds

A

Callable bonds can be called back before the maturity date

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17
Q

Convertible bonds

A

Convertible bonds can be exchanged for shares fo th efirm’s common stocks

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18
Q

Puttable bonds

A

Puttable bonds give the bond holder the option to retire or extend the bond

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19
Q

Floating rate can adjust what

A

Floating rate bonds have an adjustable coupon rate

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20
Q

Defaultable

A

Quality: Bond grading

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21
Q

What type of bond has no features or options

A

Straight Bond

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22
Q

You get a higher ______ on straight bonds

A

Rate of return

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23
Q

Foreign bonds

A
  • Issue by a borrower from a country other the one in which the bond is sold
  • bonds are dominated in the currency of the country in which it is sold
  • yankee, bonds, samurai bonds, bulldog bonds
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24
Q

Eurobonds

A

Bonds issued in the company of one country but sold in other national markets
- Eurodollar bonds, euro yen bonds

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25
Q

Inverse floaters

A

Coupon rate high
Interest low

Inverse related in inverse floaters

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26
Q

Asset backed bonds

A

Backed by cash flow issue in the future

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27
Q

Catastrophe needs bonds

A

Issue at coupon rate which is higher than normal since u dont want to pay interest

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28
Q

Indexed bonds

A

Depending on the inflation rate the coupon rate changed

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29
Q

Another name for flat price

A

Quoted price

Clean price

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30
Q

Flat price assumes the bond

A

Is purchased on a coupon payment date k

31
Q

If the bond buyer purchases a bond between payment dates the buyer’s invoice price (dirty price)=

A

Flat price + accrued interest

32
Q

Prices and yields have an ______ relationship

A

Inverse

33
Q

The bond price curve is _______

A

Convex

34
Q

The _______ the maturity, the more sensitive the bond’s prince to change in market interest rates

A

Longer

35
Q

Price risk

Short term or long term

A

Short term

36
Q

Interest rate risk

Long term or short term,

A

Long term

37
Q

Why is price risk tend to be short term

A

More variability in short term

38
Q

The current yield is the

A

Bond’s annual coupon payment divided by the bond price

39
Q

If the interest rate goes down the more likely it’ll be _____

A

Called

40
Q

YTM is a

A

Sort of average return if the bond is help to maturity

41
Q

YTM depends on

A

Coupon rate, maturity, and par value

42
Q

All the things in YTM are readily ___

A

Observable

43
Q

HPR

A

HPR is a rate of return over a particular investment period

44
Q

HPR depends on the

A

Bond’s price at the end of the holding period, an unknown future value.

45
Q

Thus, bonds are ____ _____

A

Risky assets

46
Q

Return on a bond is called is a

A

Yield to maturity

47
Q

Return is not predictable with 100% because of _____ risk

A

Reinvestment

48
Q

Investment grade

A

Low likely of default

49
Q

Speculative grade

A

High likely of default

50
Q

Investment grade bonds are rated ____ or ___ and above

A

BBB or Baa

51
Q

Speculative grade/junk bonds have rating below ____ or ____

A

BBB or Baa

52
Q

How do they rate a company

A

Coverage ratio

Leverage ratio

Liquidity ratios

Profitability ratios

Cash flow to debt

53
Q

Sinking fund s

A
  • issuer may repurchase a graven fraction of the outstanding bonds each year, or
  • issuer may either repurchase at the lower of open market price or at a pre-specified price, usually par; bonds are chosen randomly
54
Q

Eserial bonds

A

Staggered maturity dates

55
Q

Subordination of future debt

A

Senior debt holders must be paid in full before junior debt holders

56
Q

Dividend restrictions

A

Limit on liquidating dividends

57
Q

Collateral

A
  • a specific asset pledged against possible default on a bond
58
Q

What is a bond called that has no specific collateral?

A

Debenture

59
Q

A credit default swap (CDS) acts like an

A

Insurance policy on the default risk of a corporate bond or loan

60
Q

CDS buyer pays

A

Annual premiums

61
Q

CDS issuer agrees to buy the bond in a

A

Default or pay the difference between par and market values to the CDS buyer

62
Q

Term structure of interest rates

A

Relationship between yields to maturity and terms to maturity across bonds

63
Q

Yield Curve

A

Graph of yield to maturity as function of term to maturity

64
Q

Term structure theory

A
  • expectations hypothesis
  • liquidity preference hypothesis
  • market segmentation hypothesis
65
Q

Can we get some information on future market interest rates from the yield curve shape

A

Expectations hypothesis
Liquidity preference hypothesis
Market segmentation hypothesis

66
Q

Forward rates-I

A
  • interest rate at which a lending or borrowing at a future time can be arranged today
  • given a term structure of interest rates (short and long term rates), we many get arbitrage-free forward rates implied by the term structure
67
Q

Forward rates

A

Prearranged interest rates for future borrowing and lending

68
Q

Forward rates interest date is made __

A

Today

69
Q

Forward rate agreement

A

Agreement by two parties on the interest rate when borrowing and lending

70
Q

Expectations hypothesis

A

Yields are determined solely by expectations of future short term interest rates. Thus, market forwarde rates today reflect the expected future short interest rates

71
Q

Downward slopping possibility of

A

Recession

72
Q

Liquidity preference hypothesis

A

-investors demand risk premium on long term bonds

-

73
Q

Thus in general, long term bonds rates are higher because of

A

Required compensation for greater risk

74
Q

Forward rate =

A

e (future short rate) + liquidity premium

FIN 307 (26 decks)

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