Exam 3 - Chapter 10 [SLIDES] Flashcards
Indenture
[important]
Is the contract between the issuer and the bond holder
Face or par value is typically $___
1000
Face or par value
The principal repaid at maturity
The _____ ____ determines the interest payamenet
Coupon rate
Interest is usually paid _____
Semiannually
The coupon rate can be ____
Zero
Interest payments are called “_______ _____”
Coupon payments
Covenants
Not maturity is
1-10 years
Bond maturity is
10-30 years
Bonds and notes can be purchased directly from the ____
Treasury
Quoted price of 100:08 means
100 8/32 or 1002.50
30 second is
Face value
Quoted price needs to be converted into ____ price
Invoice
Corporate bonds
3 options he talked about (option features are added)
- Callable bond
- Convertible bond
- Puttable bonds
Callable bonds
Callable bonds can be called back before the maturity date
Convertible bonds
Convertible bonds can be exchanged for shares fo th efirm’s common stocks
Puttable bonds
Puttable bonds give the bond holder the option to retire or extend the bond
Floating rate can adjust what
Floating rate bonds have an adjustable coupon rate
Defaultable
Quality: Bond grading
What type of bond has no features or options
Straight Bond
You get a higher ______ on straight bonds
Rate of return
Foreign bonds
- 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
Eurobonds
Bonds issued in the company of one country but sold in other national markets
- Eurodollar bonds, euro yen bonds
Inverse floaters
Coupon rate high
Interest low
Inverse related in inverse floaters
Asset backed bonds
Backed by cash flow issue in the future
Catastrophe needs bonds
Issue at coupon rate which is higher than normal since u dont want to pay interest
Indexed bonds
Depending on the inflation rate the coupon rate changed
Another name for flat price
Quoted price
Clean price
Flat price assumes the bond
Is purchased on a coupon payment date k
If the bond buyer purchases a bond between payment dates the buyer’s invoice price (dirty price)=
Flat price + accrued interest
Prices and yields have an ______ relationship
Inverse
The bond price curve is _______
Convex
The _______ the maturity, the more sensitive the bond’s prince to change in market interest rates
Longer
Price risk
Short term or long term
Short term
Interest rate risk
Long term or short term,
Long term
Why is price risk tend to be short term
More variability in short term
The current yield is the
Bond’s annual coupon payment divided by the bond price
If the interest rate goes down the more likely it’ll be _____
Called
YTM is a
Sort of average return if the bond is help to maturity
YTM depends on
Coupon rate, maturity, and par value
All the things in YTM are readily ___
Observable
HPR
HPR is a rate of return over a particular investment period
HPR depends on the
Bond’s price at the end of the holding period, an unknown future value.
Thus, bonds are ____ _____
Risky assets
Return on a bond is called is a
Yield to maturity
Return is not predictable with 100% because of _____ risk
Reinvestment
Investment grade
Low likely of default
Speculative grade
High likely of default
Investment grade bonds are rated ____ or ___ and above
BBB or Baa
Speculative grade/junk bonds have rating below ____ or ____
BBB or Baa
How do they rate a company
Coverage ratio
Leverage ratio
Liquidity ratios
Profitability ratios
Cash flow to debt
Sinking fund s
- 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
Eserial bonds
Staggered maturity dates
Subordination of future debt
Senior debt holders must be paid in full before junior debt holders
Dividend restrictions
Limit on liquidating dividends
Collateral
- a specific asset pledged against possible default on a bond
What is a bond called that has no specific collateral?
Debenture
A credit default swap (CDS) acts like an
Insurance policy on the default risk of a corporate bond or loan
CDS buyer pays
Annual premiums
CDS issuer agrees to buy the bond in a
Default or pay the difference between par and market values to the CDS buyer
Term structure of interest rates
Relationship between yields to maturity and terms to maturity across bonds
Yield Curve
Graph of yield to maturity as function of term to maturity
Term structure theory
- expectations hypothesis
- liquidity preference hypothesis
- market segmentation hypothesis
Can we get some information on future market interest rates from the yield curve shape
Expectations hypothesis
Liquidity preference hypothesis
Market segmentation hypothesis
Forward rates-I
- 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
Forward rates
Prearranged interest rates for future borrowing and lending
Forward rates interest date is made __
Today
Forward rate agreement
Agreement by two parties on the interest rate when borrowing and lending
Expectations hypothesis
Yields are determined solely by expectations of future short term interest rates. Thus, market forwarde rates today reflect the expected future short interest rates
Downward slopping possibility of
Recession
Liquidity preference hypothesis
-investors demand risk premium on long term bonds
-
Thus in general, long term bonds rates are higher because of
Required compensation for greater risk
Forward rate =
e (future short rate) + liquidity premium
