The Bond Market Flashcards
What is a Bond?
Fixed income securities where issuers borrow from investors and they repay with interest
What are the key characteristics of Bonds?
- Face Value (par value)
- Maturity
- Coupons
- Coupon rate
Define Face Value in the context of bonds.
The payment made to the bondholder at the maturity of the bond.
What is Maturity in bond terminology?
How long the bond lives; the date when the Face Value is paid to investors.
What are Coupons in bond terms?
The interest payments made to bondholders, commonly paid annually or semi-annually.
What is the Coupon rate?
The annual interest rate defined as the interest payment divided by face value.
What is Yield to Maturity (YTM)?
The total return anticipated on a bond if held to maturity, assuming all coupon payments are made as scheduled and reinvested at the same rate.
Why is YTM important?
It helps determine whether a bond investment is profitable and allows for comparison between bonds.
What is a zero-coupon bond?
A bond that pays no coupon and only returns the principal at maturity.
What factors determine the current market price of a zero-coupon bond?
- Face Value/principal
- Maturity
- Yield to maturity (YTM)
How is the fair price of a bond determined?
By finding the total return of a bond based on its cash flows.
What is the relationship between bond price and YTM?
There is an inverse relationship; as YTM increases, bond prices decrease.
What are Straight or Vanilla bonds?
Bonds that pay a fixed coupon at regular intervals for a fixed period to maturity.
What are Callable bonds?
Bonds that can be redeemed by the issuer before maturity at the issuer’s discretion.
What are Puttable bonds?
Bonds that allow the bondholder to force the issuer to repurchase the security at a specific price before maturity.
What are Perpetual bonds?
Bonds with no maturity date, where coupons are paid indefinitely.
What is Duration in bond management?
A measure of the weighted average time until all of a bond’s cash payments are received.
What does Modified Duration measure?
The sensitivity of a bond’s price to small changes in its yield.
What is Default Risk?
The risk that a bond issuer may default on its bonds.
What is Default Risk Premium?
The additional yield on a bond that investors require for bearing credit risk.
True or False: Long-term bonds are more sensitive to interest rate movements than short-term bonds.
True
Fill in the blank: The cash flows of a bond are discounted based on the _______.
[Yield to Maturity (YTM)]
What is an Index-linked bond?
Bonds whose coupon payments are linked to a specific price index, such as the consumer price index (CPI).
What are Treasury Bills (T-Bills)?
Short-term debt instruments with a maturity of one year or less issued by the US Government.
