Topic 4- Bonds Flashcards

1
Q

What is a bond?

A

A financial claim with a promised Cf at t

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2
Q

What makes a bond better than a loan?

A

can add more features not in a loan

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3
Q

Issuing a bond creates ___

A

a bond indenture (contract) which legally protects investor (bond holder)

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4
Q

The two levels of security of a bond are?

A
  • collateralised (secured to an asset)

- debentures (insecure (secure in NZ/AUS))

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5
Q

What is the seniority ranking of bonds?

A

Senior (paid first)
Junior
Subordinate

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6
Q

4 bond issuers

A
  • government
  • local govs
  • companies
  • celebrities
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7
Q

Formula for coupon amount

A

C= fV x CR

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8
Q

A zero coupon bond

A

pays no regular interest

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9
Q

Bond Price formulae

A

C/YTM x (1- (1/(1+YTM)^(t))) + fv/(1=YTMM^(t)

- adjust t and Ytm accordingly

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10
Q

YTM = CR

A

Par bond

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11
Q

YTM < CR

A

premium bond

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12
Q

YTM > Cr

A

discount bond

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13
Q

Bond price movements are ____ to int rate movement

A

inversely proportional (int rate increase, p decreases)

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14
Q

When a bond is first issues the what are equal?

A
CR= IR
BP= fV
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15
Q

The downside of the bond market

A

the lack of transparency and its difficult to get up to date prices

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16
Q

As time goes on in the bond market price changes in response to___ and __

A

calendar turn

market shifts

17
Q

The life of a bond decreases as t goes on and maturity approaches

A

calendar turn

18
Q

the YTM changes in response to the news information

A

market shift

19
Q

Bond risks

A

interest rate risks
inflation risk
default risk

20
Q

The relationship between maturity, CR and sensitivity/risk

A

a bond with a HIGHER maturity or LOW coupon rate is more sensitive to IRR

21
Q

IRR

A

potential changes in bond price as IR fluctuates

22
Q

Inflation risk

A

an increased rate of inflation decreases the real value of interest you earn

23
Q

default risk

A

the entity promising payments but unable to deliver

24
Q

capacity and volatility of CF commitments of a firm with_____

A

a higher predictable CF and low commitments to CF has a low default risk

25
Inflation
rising prices decreasing value
26
inflation 2 formulas
r real approx = r nominal - 1 | r real = (1 + r nominal/1+ inflation) -1
27
What is the treasury yield?
The benchmark for IR for expected inflation
28
4 Corporate bond yields
default risk premium inflation risk premium time preference/real rate Interest rate risk (term) premium
29
What is the default risk premium?
Compensation for possibly for default
30
What is the IRR (term) premium?
compensation for bearing interest rate risk | higher maturity bonds have higher risk so more compensation
31
What is the Inflation risk premium?
compensation for future inflation
31
What is the real rate (time preference)?
reward for delayed compensation
32
The term structure is a curve of ___ by ___
IR by t
33
An upward sloping term structure is
nominal int rate
34
A downward sloping term structure is
risk free rate
35
The term structure is the theoretical ____
rate of return on a default risk investment
36
Capital structure is the amount of ___ and ____ used by the firm to finance investments in assets
the amount of
37
The