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BUS149 - Foundations Of Finance > Lecture 8 > Flashcards

Lecture 8 Flashcards

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1
Q

bond = ?

A

an agreement between lenders and the borrowing organisation (typically a firm or government body)

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2
Q

are lenders also bondholders?

A

yes

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3
Q

do lenders/bondholders have advantages over shareholders?

A

yes

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4
Q

why do bondholders have advantages over shareholders?

A

shareholders will lose the value of their investment if the firm went bust

however bondholders are obliged to be paid regardless of bankruptcy

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5
Q

do bondholders have voting rights?

A

no

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6
Q

par value/face value = ?

A

the principal amount that the issuer is obligated to pay at maturity date

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7
Q

coupon rate = ?

A

annual rate on a bond

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8
Q

coupon payment = ?

A

interest payment on a bond

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9
Q

annual coupon = ?

A

coupon rate x par value

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10
Q

maturity = ?

A

the specified date on which the principal amount of a bond is paid

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11
Q

trust indenture = ?

A

an extensive document between a bond issuer and a trustee

details the provisions and covenants of the loan arrangement

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12
Q

how do bonds work?

A

when a company wants to raise funds, they allow various people to give the firm loans in the form of bonds

the investors give loans to the firms

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13
Q

what are various provisions of a bond loan arrangement?

A

par value
maturity date
coupon rate

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14
Q

trustee = ?

A

represents the bondholders to ensure the bond issuer respects the indenture’s provisions

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15
Q

covenants = ?

A

outlines that impose restrictions or extra duties on the firm

promises

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16
Q

what do bond ratings do?

A

they assess the ability of the issuer to make timely payments of interest and principal

they show the risk/quality associated with the bond

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17
Q

investment grade bonds = ?

A

bonds with Baa3, BBB- or better

they have lower risk

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18
Q

junk bonds = ?

A

rated Ba1, BB+ or lower

they have higher risk

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19
Q

what does moody’s bond ratings look like?

A

Aaa, Aa1, Aa2….Baa1, Baa2….Caa, a, C

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20
Q

what does S&P and Fitch’s bond ratings look like?

A

AAA, AA+, AA….BBB+, BBB….CCC, CC, C, D

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21
Q

“coupon ticker: ford motor credit (F)” = ?

A

the firm’s ticker symbol ‘F’ symbolises ford motor credit

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22
Q

“coupon: 7.000” = ?

A

coupon rate is 7%

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23
Q

“maturity: 2027” = ?

A

bond matures in 2027

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24
Q

“last price: 117.26” = ?

A

bond’s closing price as a percentage of par value is 117.26%

e.g, par value is £1000, 117.26% * £1000 = £1172.60 closing price

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25
Q

“last yield: 3.76” = ?

A

an estimate of the investor’s return on the bond if it was purchased today and held to maturity

last yield was 3.76%

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26
Q

“spread: 236” = ?

A

the difference between the yield to maturity on the bond and a similar US treasury bond is 236 basis points (2.36%)

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27
Q

“UST: 5” = ?

A

the maturity length of a similar US treasury bond is 5 years

28
Q

“est. $ vol (000s): 230,068”

A

expected trading volume of the bond is $230,068,000

29
Q

what information is quoted for corporate bonds?

A

company ticker symbol
coupon rate
maturity date
last price
last yield
spread
UST
est. vol

30
Q

what information is quoted on treasury bonds?

A

coupon rate
maturity mo/yr
bid price
asked price
% chg.
asked yield

31
Q

“rate: 4.000” = ?

A

coupon rate for the bond is 4% of par value

32
Q

“maturity mo/yr: feb 27” = ?

A

bond matures in February 2027

33
Q

“bid: 100:27” = ?

A

the price to buy the bonds is 100 27/32% of of par

e.g., par value = £1000, bid price is £1008.44

27/32% + 100% * £1000 = £1008.44

34
Q

“asked: 100:28” = ?

A

the price to sell the bonds is 100 28/32% of par

e.g., par value = £1000, asked price is £1008.75

28/32% + 100% * £1000 = £1008.75

35
Q

bid-ask spread = ?

A

represents dealer profit, the difference between the bid and ask price

36
Q

spreads often indicate…?

A

how liquid a security is

the narrower the bid-ask spread, the greater the liquidity (& usually greater trading volume)

37
Q

“chg.: -1” = ?

A

change in price was -1/32 of a percentage point

38
Q

“asked yld: 1.95” = ?

A

yield to maturity on asked price is 1.95%

39
Q

price of an asset = ?

A

present value of future expected cash flows

cf/1+r + cf/1+r to the power of 2 + cf/1+r to the power of 3 + cf/1+r to the power of 4 etc…

40
Q

the value of a bond with annual coupon payments = ?

A

bond value = present value of the coupons + present value of the par value

coupon payment cf/(1+r) to the power of 0 + coupon payment cf/(1+r) to the power of 1 + face value + coupon/(1+r) to the power of 2

41
Q

price = ?

A

the bond’s value in period zero

42
Q

CF = ?

A

the coupon payment

43
Q

par value = ?

A

the bond’s principal amount

44
Q

r = ?

A

the rate of return required by investors on this quality risk-class of bonds

interest rate

45
Q

intrinsic value = ?

A

the maximum price to pay for an asset

the best estimate of the economic value of an asset based on a forecast of future cash flows and an estimate of the appropriate discount rate

46
Q

what is the equation if coupons are paid semi-annually?

A

r is the semi-annual discount/compound rate

r/2

YTM (using APR) = r x 2; YTM/2 = r
n = # of years to maturity x 2

47
Q

suppose a semi-coupon bond has a $1,000 par value, coupon rate 8%
paid once per year and 10 years until maturity. The YTM is 10%, What is the bond
price?

A

r = YTM (10%) / 2 = 5%
n = 10 x 2 = 20

pv coupons = $1000 x 1.08 = $80 / 2 = $40 … $40 x ((1-1/1.05 to the power of 20) / 0.05) = $498.49

pv face value = $1000/1.05 to the power of 20 = $376.89

total bond value = 498.49 + 376.89 = $875.38

48
Q

bond value < face value = ?

A

sell at discount

49
Q

bond value > face value = ?

A

sell at premium

50
Q

suppose a semi-coupon bond has a $1,000 par value, coupon rate 8%
paid once per year and 10 years until maturity. The YTM is 6%, What is the bond
price?

A

r = YTM/2 = 3
n = 10 x 2 = 20

pv coupons = 1000 x 1.08 = 80/2 = 40; 40 x ((1-1/1.03 to the power of 20)/0.03) = 595.1

pv face value = 1000/1.03 to the power of 20 = 553.68

total bond value = 553.68 + 595.1 = 1148.78

51
Q

suppose a semi-coupon bond has a $1,000 par value, coupon rate 8%
paid once per year and 10 years until maturity. The YTM is 8%, What is the bond
price?

A

r = YTM/2 = 4%
n = 10 x 2 = 20

pv coupons = 1000 x 1.08 = 80/2 = 40; 40 x ((1-1/1.04 to the power of 20)/0.04) = 543.61

pv face value = 1000 / 1.04 to the power of 20 = 456.39

total bond value = 456.39 + 543.61 = 1000

52
Q

interest rate risk = ?

A

fluctuating interest rates lead to varying asset prices

52
Q

bond value = face value = ?

A

sell at face value

52
Q

rising interest rates have what impact on bond prices?

A

rising interest rates lead to falling bond prices

53
Q

falling interest rates have what impact on bond prices?

A

falling interest rates lead to rising bond prices

54
Q

what is the relationship between interest rates and bond prices described as?

A

the seesaw effect

55
Q

when everything else is equal, the longer the time to maturity…

has what impact on interest rate risk?

A

the longer the time to maturity, the higher the interest rate risk

56
Q

when everything else is equal, the lower the coupon rate…

has what impact on interest rate risk?

A

the lower the coupon rate, the greater the interest rate risk

57
Q

what are the 3 types of US government bonds?

A

treasury bill
treasury note
treasury bond

58
Q

treasury bill = ?

A

debt instrument issued by the us government and has less than 1 year maturity

59
Q

treasury note = ?

A

debt instrument issued by the US government and has between 1-10 year maturity

60
Q

treasury bond = ?

A

debt instrument issued by the US government and has more than 10 year maturity

61
Q

what impact does interest rate risk have on investors’ demands?

A

investors will demand a larger risk premium for bonds whose price is especially sensitive to interest rate changes (higher interest rate risk)

62
Q

horizon risk premium = ?

A

additional expected return to compensate for risk associated with investing in a longer-term bond with the same credit risk as a shorter-term bond

63
Q

what’s the difference in YTM between long term bonds with low coupon rates and short-term bonds with high coupon rates?

A

expect higher yields to maturity (YTM) for long term bonds with low coupon rates than for short-term bonds with high coupon rates

BUS149 - Foundations Of Finance (19 decks)

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