Final Ch 17 Flashcards
Basis Point
One one‐hundredth of a percentage point
Term Structure of Interest Rates
The relationship between time to maturity and
yield for a particular category of bonds
Yield Curve
A graphical depiction of term structure of interest
rates
Expectations Theory (of the Term Structure)
The return to a longer‐maturity bond is equal to
the average of the expected returns to one‐year
bonds
Liquidity Preference Theory (of the Term
Structure)
Long‐term bonds should offer a higher yield since
investors require a liquidity premium to lend long
term.
Yield spreads
The relationship between bond yields and the
particular features of various bonds
Premium Bond
A bond selling for more than its face value
Discount Bond
A bond selling for less than its face value
Yield to Maturity
The promised compounded rate of return on a
bond purchased at the current market price and
held to maturity.
Bond‐Equivalent Yield
Yield on an annual basis derived by doubling the
semiannual yield.
Realized Compound Yield
Yield earned based on actual reinvestment rates
Yield to Call
The promised return on a bond from the present
to the date that the bond is likely to be called.
Reinvestment Rate Risk
Risk resulting from uncertainty about the rate at
which future interest coupons can be reinvested.
Price Risk
The part of interest rate risk resulting from
uncertainty about what the bond can be sold for in
the future
Forward Rates
Rates that are expected to prevail in the future.
Unobservable but anticipated future bond rates
Bond Ladder
Purchase bonds with different maturity dates to
partially protect against interest rate risk.
Duration
The average time that cash flows are paid over the
life of the bond calculated as the present‐value
weighted average of the timing of the payments
Relationship between bond prices and interest
rates.
Bond prices move inversely to interest rates.
Relationship between bond price movements and
maturity.
For a given change in market yields, changes in
bond prices are directly related to time to
maturity. Therefore, long‐term bond prices
fluctuate more that short‐term bond prices.
Relationship between bond price volatility and
coupons.
Bond price fluctuations (volatility) and bond
coupon rates are inversely related.
