Muni Bonds Flashcards
To learn basic muni bond math
What is yield?
The yield on a bond is a measure of the return (or earnings) realized by holding the bond. The yield is determined by the market, the overall supply and demand for the bond. As we saw in the previous section the yield will usually vary depending on the final maturity of the bond.
What affects the price of a bond?
The price to be paid for a bond also varies based on the coupon that is attached to the bond. The coupon is the actual rate of interest that is paid to the bond investor. A 5 percent coupon on a (dollars)100 bond pays (dollars)5/year.
What is a par bond?
A par bond is a bond that can be purchased at 100 percent of its underlying value. A bond that has a principal amount of (dollars)100 at maturity will sell for (dollars)100 right now if its coupon is the same as the current market yield.
If a bond is trading at a premium, its coupon is (greater/less) than its yield.
greater
If you own a bond and the market yield rises the price of the bond ____.
If you own a bond and the market yield rises the price of the bond falls.
Why might an investor prefer a discounted bond?
Call protection. In a market environment where interest rates are falling it will take longer for a bond with a lower coupon to be profitably called by the issuer of the bond when compared to a higher coupon bond.
Why might an investor prefer a premium bond?
Less volatility. If interest rates rise after you purchase the bond the value of the bond will fall, but not as quickly as a lower coupon bond would. This is because more of the value of the bond is in the stream of early coupon payments to be received in the near future rather than the final maturity amount. The present value of payments to be received earlier (in this case, the coupon payments) doesn’t change as much as payments received later (like the principal amount at maturity) for a given change in interest rates.
If market yields rise to 6 percent, the bond with a 5 percent coupon is now paying a rate that is (blank) valuable in the market. The price of this less valuable bond will (blank) and it will trade at a (blank) to par
If market yields rise to 6 percent, the bond with a 5 percent coupon is now paying a rate that is less valuable in the market. The price of this less valuable bond will therefore fall and it will trade at a discount to par
Give a five-word definition of duration.
How price changes with yield
If duration is greater than risk, the bond is trading at ____
a discount
A bond with greater convexity is (more/less) affected by a change in interest rates
less
An inverted yield curve is a (positive/negative) economic indicator
negative indicator
