Important Ch6 L8

Question 1

Bonds

Answer 1

A bond is a security sold by governments and corporations in order to raise money from investors today in exchange for a promised future payment

Question 2

bond certificate

Answer 2

A certificate showing the terms of the bond as well as amounts and dates for all payments

Question 3

maturity date

Answer 3

final repayment date, the time from the bond being bought until the maturity date is called the term of the bond

Question 4

Coupons

Answer 4

sometimes additional payments promised

Interest payments are called coupon payments and they are decided by the coupon rate set by the issuer, usually expressed as APR

Question 5

Principal or Face value

Answer 5

the notional amount used to compute the interest payments

What the bond is worth on the market (without discount)

Question 6

Zero-Coupon bonds

Answer 6

Bonds without the additional promise of coupon payments. Here the investor only receives the face value of the bond at the maturity date

also called pure discount bonds since they’re traded at a discount

Question 7

Yield to maturity (YTM)

Answer 7

the discount rate that sets the PV of the promised bond payments equal to the current market price of the bond

aka. the rate of return of buying the bond

Question 8

Coupon bonds

Answer 8

Differ from zero coupon bonds as the return isn’t only from the difference in discount and face value but also from the coupon payments

Question 9

corporate bonds

Answer 9

bonds issued by corps instead or governments

with corp bonds the risk is higher since the issuer mat choser to default (not pay back the amount that was promised) this risk is called the credit risk

Question 10

Corporate bond yield

Answer 10

risky corporate bonds mat have a higher YTM because it is based on the expected cash flows which might decrease if a company is doing poorly