Topic 4- Bonds

Question 1

What is a bond?

Answer 1

A financial claim with a promised Cf at t

Question 2

What makes a bond better than a loan?

Answer 2

can add more features not in a loan

Question 3

Issuing a bond creates ___

Answer 3

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

Question 4

The two levels of security of a bond are?

Answer 4

• collateralised (secured to an asset)

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

Question 5

What is the seniority ranking of bonds?

Answer 5

Senior (paid first)
Junior
Subordinate

Question 6

4 bond issuers

Answer 6

• government
• local govs
• companies
• celebrities

Question 7

Formula for coupon amount

Answer 7

C= fV x CR

Question 8

A zero coupon bond

Answer 8

pays no regular interest

Question 9

Bond Price formulae

Answer 9

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

- adjust t and Ytm accordingly

Question 10

YTM = CR

Answer 10

Par bond

Question 11

YTM < CR

Answer 11

premium bond

Question 12

YTM > Cr

Answer 12

discount bond

Question 13

Bond price movements are ____ to int rate movement

Answer 13

inversely proportional (int rate increase, p decreases)

Question 14

When a bond is first issues the what are equal?

Answer 14

CR= IR
BP= fV

Question 15

The downside of the bond market

Answer 15

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

Question 16

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

Answer 16

calendar turn

market shifts

Question 17

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

Answer 17

calendar turn

Question 18

the YTM changes in response to the news information

Answer 18

market shift

Question 19

Bond risks

Answer 19

interest rate risks
inflation risk
default risk

Question 20

The relationship between maturity, CR and sensitivity/risk

Answer 20

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

Question 21

IRR

Answer 21

potential changes in bond price as IR fluctuates

Question 22

Inflation risk

Answer 22

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

Question 23

default risk

Answer 23

the entity promising payments but unable to deliver

Question 24

capacity and volatility of CF commitments of a firm with_____

Answer 24

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

Question 25

Inflation

Answer 25

rising prices decreasing value

Question 26

inflation 2 formulas

Answer 26

r real approx = r nominal - 1

r real = (1 + r nominal/1+ inflation) -1

Question 27

What is the treasury yield?

Answer 27

The benchmark for IR for expected inflation

Question 28

4 Corporate bond yields

Answer 28

default risk premium
inflation risk premium
time preference/real rate
Interest rate risk (term) premium

Question 29

What is the default risk premium?

Answer 29

Compensation for possibly for default

Question 30

What is the IRR (term) premium?

Answer 30

compensation for bearing interest rate risk

higher maturity bonds have higher risk so more compensation

Question 31

What is the Inflation risk premium?

Answer 31

compensation for future inflation

Question 31

What is the real rate (time preference)?

Answer 31

reward for delayed compensation

Question 32

The term structure is a curve of ___ by ___

Answer 32

IR by t

Question 33

An upward sloping term structure is

Answer 33

nominal int rate

Question 34

A downward sloping term structure is

Answer 34

risk free rate

Question 35

The term structure is the theoretical ____

Answer 35

rate of return on a default risk investment

Question 36

Capital structure is the amount of ___ and ____ used by the firm to finance investments in assets

Answer 36

the amount of

Question 37

The