Topic 6: Bond Pricing Flashcards
1
Q
What is the price of a zero coupon bond?
A
2
Q
What is the yield of a zero coupon bond?
A
3
Q
Why does the yeild curve slope upward?
A
Three explanations:
- Expectations theory. Rising interest rate suggests rise in risk free rate.
- Market segmentation. Central banks and financial intermediaries trade at the short end, and investors and savers at the long end.
- Liquidity preference. Savers have a preference to be liquid and borrow short, while investors prefer to borrow long.
4
Q
What is the duration of a bond?
A
The weighted average of waiting time for payments, weighted by their present value.
5
Q
What is the value of a perpetuity?
A
B = C / r
6
Q
When can a yield go negative?
A
When the price of the bond is bid high enough.
