Session 2

Question 1

Bond Indenture

Answer 1

Legal contract stating terms of the bond

Question 2

Bond Covenants

Answer 2

Additional requirements or conditions on the borrowing as
written in the indenture

Question 3

Face Value

Answer 3

Notional amount used to compute the interest payments

Question 4

Maturity Date

Answer 4

Final repayment date

Question 5

Term

Answer 5

The time remaining until the repayment date

Question 6

Coupon Rate

Answer 6

Determines the amount of each coupon payment,
expressed as an APR

Question 7

Coupon Payment

Answer 7

CPN = (Coupon Rate x Face Value) / (Number of payments per year)

Question 8

Bond Value

Answer 8

(C/y)[1-1/(1+y)^t]+(F/(1+y)^t)

Question 9

Consol Bonds

Answer 9

Bonds which live forever, PV = C/Y

Question 10

When coupon rate = y

Answer 10

price = par value

Question 11

When coupon rate > y

Answer 11

price > par value (premium bond)

Question 12

When coupon rate < y

Answer 12

price < par value (discount bond)

Question 13

The bond trades at par

Answer 13

When the y = coupon

Question 14

Spot Rates

Answer 14

• Future spot rates are unknown today

Question 15

Forward Rates

Answer 15

Rates which start in the future, but are known now

Question 16

Downward Sloping Yield Curve

Answer 16

Forward rates are lower than spot rates

Question 17

Upward Sloping Yield Curve

Answer 17

Spot rates are lower than forward rates

Question 18

Bond classification

Answer 18

Senior debt paid off before junior / subordinate debt

Question 19

What is the typical slope of the yield curve?

Answer 19

Upward

Question 20

Which bonds give higher yield corporate or treasury?

Answer 20

Corporate

Question 21

How are bond prices and interest rates related?

Answer 21

Bond prices and market interest rates move in opposite directions

Question 22

Are there bonds without maturity?

Answer 22

Yes, perpetuities