Lecture 2 and 3

Question 1

risk-free interest rate

Answer 1

If the cash flows are risk-less

Question 2

the opportunity cost of capital

Answer 2

The expected return on other, “equivalently risky”, investments

Question 3

Financial Asset

Answer 3

Contractual claim to a stream of cash flows

Question 4

Financial Security

Answer 4

Financial asset that is tradable

Question 5

Securitization

Answer 5

The process of making assets tradable

Question 6

Bond

Answer 6

a debt security in which the issuer (borrower/debtor) promises to repay to the
lender/investor the amount borrowed plus interest over a specified period of time

Question 7

Principal value

Answer 7

the amount that the issuer agrees to repay at maturity

Question 8

maturity

Answer 8

the date the bond will cease to exist and the issuer will redeem the
bond by paying the amount owed.

Question 9

term to maturity

Answer 9

the number of years during which the issuer has promised to meet the conditions of the obligation

Question 10

Coupon

Answer 10

stated interest payment made on a bond

Question 11

Coupon rate

Answer 11

annual coupon divided by the par value (face value) of a bond

Question 12

Straight coupon

Answer 12

bond that has a fixed coupon over the bond’s maturity

Question 13

Zero coupon bond

Answer 13

bond that makes no coupon payment. The only return investor
receives is difference between what was paid for the debt and its face value at maturity

Question 14

Floating rate bond

Answer 14

bond where the coupon rate (and the coupon payment) is adjustable.

Question 15

Security

Answer 15

: a debt may be unsecured or secured with the pledge of specific property. An
unsecured debt is referred to as a debenture

Question 16

Seniority

Answer 16

indication of preference in the claim on assets and income

Question 17

What determines the bond return?

Answer 17

The return that an investor receives from any security is based on a
comparison of the future cash flows received with the initial investment.

Question 18

Yield to maturity (YTM)

Answer 18

the yield (rate of return, interest rate) required by the
market to invest in the bond if it were held until maturity

Question 19

Discount Bond

Answer 19

When the YTM > the coupon rate, a bond will be valued below its
par value.

Question 20

Premium Bond

Answer 20

When the YTM < the coupon rate, a bond will be valued above its
par value

Question 21

Bond prices are subject to the effects of both:

Answer 21

The passage of time and changes in the interest rates

Question 22

holding period
return.

Answer 22

If you sell the bond before it matures, your realized return is known as the holding period
return