unit 5 - module 10 Bonds

Question 1

yield to maturity

Answer 1

the rate of return that an investor will earn if they buy the bond on the published date and hold the bond until maturity

Question 2

BONDS rules

Answer 2

1. when IR goes up, Bond prices goes down, when MIR go up bond prices go down

2.the longer the bonds term, the higher the bonds yield.
the shorter the bonds term, the lower the bonds yield.

Question 3

price risk

Answer 3

market interest rates will go up, causing your bond price to go down if you sell your bond before it matures
- price risk rises as market interest rices

Question 4

liquidity premium theory

Answer 4

an investor would rather have their money tied up for a short period of time instead of a long period. and if if going to be a long period, the should they expect something extra for that–> a premium

Question 5

Zero coupon bonds

Answer 5

does not pay interest at regular intervals such as annually. makes only one payment of total Market interest of the face value on the maturity date
-no coupon

Question 6

municipal bonds

Answer 6

issued by state and local governments and their many local jurisdictions such as school districts, water districts etc.

Question 7

treasury securities

Answer 7

debt issued by federal government

ex. national debt.

Question 8

3 kinds of treasury securities

Answer 8

1. treasury bills- shortest 1 month -1 year
2. treasury notes
3. treasury bonds- beyond 10 years
   - loans to the government for different time

Question 9

corporate bonds

Answer 9

issued by businesses, government bonds have lower interest rates than do actively traded corporate bonds.

Question 10

callable bonds

Answer 10

not common, mainly apply to municipal bonds. allows issuer to reduce the terms of the bonds

Question 11

coupon rate

Answer 11

the interest rate paid on the bond offered by the corporation or government

Question 12

par value of bond

Answer 12

• then original price of the bond. without the rate

if a bonds coupon rate is equal to its YTM than the bond is selling at par

Question 13

relationship of MR and bond price

Answer 13

when market interest rates decrease, the market price of existing bonds rises above par

Question 14

Reinvestment risk

Answer 14

the risk that a bond is repaid early when MIR go down.

- reinvestment risk rises when MIR falls

Question 15

debenture

Answer 15

bond that is not secured by any company assets.