Lecture 4 - Valuing Bonds Flashcards
What is a bond
- a publicly traded form of debt
- issued to fund projects or operations by businesses or local governments
what is an indenture agreement
a legal contract describing…
- the bond characteristics
- the bondholder
- the issuer rights
what are U.S treasury bonds
the safest fixed income investments in the world
what are corporate bonds
they provide corporations with necessary capital to finance investments in equipment, R&D etc
what are municipal bonds
issued by state and local gov
what are asset backed securities?
they are debt securities whose payment originate from other loans, such as credit and debit card debt.
what are convertible bonds
these give the bondholder a choice between the par value and a specified number of shares of stocks
how much do premium and discount bonds sell for
premium - greater than par
discount - lower than par
what is bid and ask
bid - the price at which investors can sell
ask - the price at which investors can buy
what is the relationship between market interest rates and bond prices
inversely related (one goes up, the other goes down)
what is interest rate risk
the chance of a capital loss due to interest rate fluctuations
what is reinvestment rate risk
the chance future interest payments will have to be reinvested at a lower interest rate
what is the current yield
the bonds annual coupon rate divided by the bonds current market price
what is YTM
- yield to maturity
- reflects the total return the bond offers if purchased at the current price and held to maturity
what are the different grades of bonds
- Investment grade bonds
AAA, AA, A, BBB - Junk bonds
BB, B, CCC, CC, C, D
