Lecture 3

Question 1

Why do lenders accept lower yields for bonds than for a bank loan?

Answer 1

Greater liquidity

Question 1

True or false: bonds are an expensive way to raise finance

Answer 1

False - issuing is costly but generally cheaper than borrowing from banks

Question 2

Are bonds money market or capital market instruments?

Answer 2

Capital market (maturity >1 year)

Question 3

What are terms for the the ‘yield’ of a bond?

Answer 3

• Yield to maturity
• Redemption yield
• Internal rate of return (IRR)

Question 4

If the price of a bond falls, what happens to the yield?

Answer 4

It rises

Question 5

When does the price of a bond drop?

Answer 5

Immediately after coupon payment

Question 6

What is the clean price of a bond?

Answer 6

actual price - accrued interest

Question 7

What is quantitative easing?

Answer 7

Central bank buys government bonds

Question 8

How does quantitative easing work?

Answer 8

1. Increased money supply directly increases spending (monetarist explanation)
2. Higher bond prices = lower yields = increased spending

Question 9

What does it mean if a bond is trading at a premium?

Answer 9

Trading above its par value

Question 10

What does it mean if a bond is trading at a discount?

Answer 10

Trading below its par value

Question 11

What is the ‘pull to par’?

Answer 11

Bond prices approach par as they near maturity

Question 12

What can the ‘yield’ of a bond refer to?

Answer 12

1. YTM / IRR
2. Coupon yield

Question 13

If RRR < IRR, what does that mean?

Answer 13

NPV is positive

Question 14

If RRR > IRR, what does that mean?

Answer 14

NPV is negative

Question 15

When would redemption yield = coupon yield?

Answer 15

When the bond is trading at par