Valuing Bonds & Shares Flashcards
What is a bond?
A certificate showing that a borrower owes a specified sum.They are debt securities that promise to pay a fixed stream of income to holders. They vary in their degree of riskiness and their time to maturity
Who is issuing bonds?
Government bonds, corporate bonds, and municipalities
What are the characteristics of a bond?
Face or par value, coupon payment, coupon rate, maturity date
What are the different types of bonds?
Callable bonds, putable bonds, convertible bonds, console bonds, foreign bonds, and eurobonds
What is the bond value determined by?
The present value of the coupon payments and par value
What is a pure discount bond?
Simplest kinds of bond, it promises a single payment at a fixed future date
What is the information needed for valuing pure discount bonds?
Time of maturity, face value and discount rate
What are consols?
Bonds that never stop paying a coupon, have no final maturity date and therefore is never mature. Thus, a console is a perpetuity
What is an example of a consol?
A preferred stock
What is a level coupon bond?
Typical bonds issued by either governments or corporations offer cash payments not just at maturity, but also at regular times in between
What does yield to maturity mean?
Interest rate that makes the present value of the bonds payments equal to its price
What is the yield of maturity required for?
Market interest rate on the bond, not the coupon rate
What happens when the coupon rate = YTM?
Price = par value
What happens when the coupon rate > YTM?
Price > par value (premium bond)
What happens when the coupon rate < YTM?
Price < par value (discount bond)
