Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

2nd Year - Finance 1 > Lecture 4 - Valuing Bonds > Flashcards

Lecture 4 - Valuing Bonds Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 65 flashcards Series 63 flashcards Series 66 flashcards Series 7 Top-off Exam flashcards SIE Exam flashcards CFA flashcards Series 79 Top-Off Exam flashcards
1
Q

What is the price of a bond?

A

The present value of all cash flows generated by the bond (i.e. coupons and face value) discounted at the required rate of return.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

When the market interest rate exceeds the coupon rate…

A

Bonds sell for less than face value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

When the market interest rate is below the coupon rate…

A

Bonds sell for more than the face value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

When the interest rate rises, the present value of the payments to be received by the bondholder…

A

Falls and bond prices fall.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Conversely, a decline in the interest rate…

A

Increases the present value of the payments to be received by the bondholder and bond prices increase.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What do interest rate changes affect?

A

The present value of the coupon payments but not the coupon payments themselves.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

If the market interest rate falls…

A

The price of bonds rise.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

If the market interest rate rises…

A

The price of bonds fall.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Any changes in interest rates has a greater impact on the price of long term bonds than…

A

The price of short term bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the current yield?

A

Annual coupon payment divided by bond price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is yield to maturity?

A

The discount rate that equates the bond’s price to the present value of all its promised future cash flows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are premium bonds?

A

Bonds selling above par value. Investors who buy a bond at premium must absorb a capital loss over the life of the bond, so the return on these bonds is always less than the bond’s current yield. Coupon rate > current yield > YTM.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are discount bonds?

A

Bonds selling below par value. Investors in discount bonds receive a capital gain over the life of a bond, so the return on these bonds are always greater than the bond’s current yield. Coupon rate < current yield < YTM.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the rate of return?

A

Total income per period per dollar invested.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

If interest rates rise, what will the relationship between rate of return and YTM be?

A

The rate of return will be less than the yield to maturity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

If interest rates fall, what will the relationship between rate of return and YTM be?

A

The rate of return will be greater than the yield to maturity.

17
Q

What does YTM measure?

A

The rate of return you will earn if you buy a bond today and hold it till maturity.

18
Q

What does the yield curve show?

A

It plots the relationship between the yield to maturity and time to maturity.

19
Q

What are spot interest rates?

A

They are the discount rates for default free, zero coupon bonds. Interest rate fixed on a loan that is made today.

20
Q

What is the term structure of interest rates?

A

The set of spot rates for all possible future dates.

21
Q

What does the current yield not measure?

A

The bond’s total rate of return. It overstates the return on premium bonds and understates that of discount bonds.

22
Q

What does the current yield measure?

A

It focuses on the current income and ignores prospective price increases or decreases.

23
Q

What are forward rates?

A

Interest rates fixed on a loan to be made at a later date. It is also known as future yield on a bond. It is a forecast of a future spot rate.

24
Q

What is expectation hypothesis?

A

In well functioning markets, investments in short maturity bonds must offer the same expected returns as an investment in a single long maturity bond. Relatively high yields on long term bonds reflect expectations of future increases in rates.

25
Q

What is the liquidity preference theory?

A

Long term bonds are subject to greater interest rate risk than short term bonds. Investors in long term bonds might require a risk premium to compensate them for bearing the risk.

26
Q

What is a normal yield curve?

A

A normal yield curve is upward sloping. Longer maturity bonds have a higher yield compared with shorter term bonds due to the risk associated with time.

27
Q

What is an inverted yield curve?

A

An inverse yield curve is downward sloping. The shorter term yields are higher than longer term yields, which can be a sign of upcoming recession. An inverse yield curve might be expected when interest rates are high but expected to fall.

28
Q

What is a flat yield curve?

A

The shorter and longer term yields are very close to each other, which is also a predictor of an economic transition.

29
Q

In the presence of inflation, an investor’s real interest rate is always…

A

Less than nominal interest rate.

2nd Year - Finance 1 (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions