Module 2 Flashcards

1
Q

Bond

A

A long term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.

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2
Q

Treasury bonds

A

bonds issued by the federal government, sometimes referred to as government bonds

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3
Q

Corporate bonds

A

bonds issued by corporations

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4
Q

Municipal bonds

A

bonds issued by state and local government

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5
Q

Foreign bonds

A

bonds issued by foreign government or by foreign
corporations

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6
Q

Par value of a bond

A

face amount of the bond, which is paid at maturity

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7
Q

Coupon interest rate

A

stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest

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8
Q

Maturity date

A

years until the bond must be repaid

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9
Q

Issue date

A

when the bond was issued

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10
Q

Yield to maturity

A

rate of return earned on a bond yield held until maturity

(also called the “promised yield”)

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11
Q

Call provisions on bonds

A
  • Allows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor)
  • Bond investors require higher yields on callable bonds.
  • In many cases, callable bonds include a deferred call provision.
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12
Q

Convertible bond

A

may be exchanged for common stock of the firm, at the
holder’s option

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13
Q

Warrant

A

long term option to buy a stated number of shares of common
stock at a specified price.

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14
Q

Putable bond

A

allows holder to sell the bond back to the company prior to
maturity.

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15
Q

Income bond

A

pays interest only when interest is earned by the firm.

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16
Q

Indexed bond

A

interest rate paid is based on the rate of inflation.

17
Q

The value of any financial assets a stock, a bond, a lease, or even a physical asset such as an apartment building or a piece of machinery is .

A

the present value of the cash flows the asset is expected to produce.

20
Q

bond sells at a premium

A

the coupon rate > the yield to maturity

21
Q

bond sells at a discount when

A

the coupon rate < the yield to maturity

22
Q

Bonds with semiannual coupons

23
Q

Bond Yields

24
Q

Yield to Maturity

25
Bond Yields can also be viewed as...
Can also be viewed as the bond’s promised rate of return , which is the return that investors will receive if all of the promised payments are made.
26
YTM equals the expected rate of return only when
(1) the probability of default is zero (2) the bond cannot be called
27
T or F If there is some default risk or the bond may be called, there is some chance that the promised payments to maturity will not be received.
True
28
Yield to call
* If you purchase a bond that is callable and the company calls it, you do not have the option of holding it to maturity. * Therefore, the yield to maturity would not be earned. * For example, if a company’s 10% coupon bonds were callable and if interest rates fell from 10% to 5%, the company could call in the 10% bonds, replace them with 5% bonds, and save $100 --$50 = $50 interest per bond per year; beneficial to the company, but not to its bondholders.
29
YTC is the ...
30
Changes in Bond Value over Time What would happen to the value of these three bonds if the required rate of return remained at 10%
31
Changes in Bond Value over Time
32
The two key factors that impact a bond’s riskiness
* Price risk * Reinvestment risk
33
Price risk
34
Reinvestment risk
35
Default Risk
36
Assessing a Bond’s Riskiness