FI quant Flashcards
annual coupon
coup rate * face value, if semi-annual divide by 2
price zero coupon bond
Pzero = F/((1+yt)^t)
price coupon bond
pcouponbond= REVIEW
bond
A fixed-income security that promises to pay specified cash flows over a specified time period.
Q: What are you doing when you invest in a bond?
Lending money to the issuer, becoming a creditor.
Q: What is the face value or par value of a bond?
A: The amount paid to the bondholder at maturity.
coupon payment
A: A periodic interest payment made to bondholders.
coupon rate
A: The annual coupon amount expressed as a percentage of the face value.
zero coupon bond
A: A bond that pays only face value at maturity and no interim coupons.
Pzero
A: Price = Face Value / (1 + spot rate)^years to maturity.
current yield
A: Annual coupon divided by the current market price of the bond.
Q: How does the current yield differ from the coupon rate?
A: Coupon rate is based on face value; current yield is based on market price.
YTM
A: The interest rate that equates the present value of the bond’s payments to its price.
yield curve
A: A graph showing the relationship between bond yields and maturities.
upward sloping yield curve
A: Investors expect higher interest rates in the future.
downward (inverted) sloping yield curve
A: Investors expect lower interest rates in the future.
expectations theory
A: Long-term rates reflect current and expected future short-term rates.
liquidity premium theory
A: Long-term bonds require a premium for added risk of locking money up longer.
Q: What is the Market Segmentation Theory?
A: Short- and long-term bonds are in separate markets with different supply and demand.
callable bond
A: A bond that the issuer can repurchase before maturity at a set price.
puttable bond
A: A bond the holder can sell back to the issuer before maturity at a set price.
Q: How do callable and puttable features affect bond prices?
A: Callable bonds are cheaper (issuer advantage); puttable bonds are more expensive (holder advantage).
bond arbitrage
A: Taking advantage of mispricing by replicating a bond’s cash flows using strips or other bonds.
default risk
A: The risk that a bond issuer may fail to make promised payments.
Q: Who rates bonds for default risk?
A: Credit rating agencies like Moody’s, S&P, and Fitch.
Q: What compensates investors for default risk?
A: A higher yield or default risk premium.
Q: What happens to bond prices as they approach maturity?
A: They converge to their par value.
Q: How are premium and discount bonds defined?
A: Premium: Price > Par (coupon > YTM); Discount: Price < Par (coupon < YTM).
