Topic 3

Question 1

what are bonds?

Answer 1

-debt securities
-there is a borrower/issuer and a lender/buyer

Question 2

what are bonds used to do?

Answer 2

to borrow money by a wide variety of issuers

Question 3

what is a key mechanism for policy action by central banks?

Answer 3

bonds

Question 4

what are the basic characteristics of (typical) bonds?

Answer 4

-face value
-the maturity of the bond
-the coupon of the bond
-a market price

Question 5

what is meant by the ‘face value’ of the bond?

Answer 5

how much will be paid back by the issuer of the bond to the borrower/holder

Question 6

what is meant by the ‘maturity’ of the bond?

Answer 6

the length of time the money is borrowed for

Question 7

what is meant by the ‘coupon’ of the bond?

Answer 7

this is a periodic payment from the issuer to the holder of the bond,
expressed as a fixed percentage of the face value

Question 8

what is meant by the ‘market price’ of a bond?

Answer 8

• The price of the bond is not necessarily the same as the face value: it will typically differ.
• If the price happens to be the same at the face value, the bond is trading at par.
• If the price is above the face values, the bond is trading at a premium to the face value, or above par.
• If the price below the face value, the bond is trading at a discount to the face value, or below par.

Question 9

what is meant by bonds with ‘infinite maturities’?

Answer 9

they are never redeemed, but pay out a coupon for ever

Question 10

what are meant by bonds that are ‘callable’?

Answer 10

can be redeemed at a given time before the maximum maturity at the discretion of the issuer

Question 11

what is the ‘current yield’ of a bond?

Answer 11

coupon payment/market price