Week 4: Bond Markets Flashcards
What is the main difference between the money and capital markets?
Capital market seurities tend to have longer maturities ( > 1 year)
Rank Treasure bills, bonds, and notes, from shortest to longest maturity
- bills < 1 year
- notes < 1-10 years
- bonds > 10-30 years
What are Treasury Inflation-Protected Securities (TIPS)?
principal amount is tied to the current inflation rate to protect purchasing power
What are Treasury Inflation-Protected Securities (TIPS)?
principal amount is tied to the current inflation rate to protect purchasing power
What are Treasury STRIPS?
STRIPS=Separate Trading of Registeted Interest and Principal Securities
Coupon & principal amounts stripped from T-bond and sold as individual 0-coupon bonds. The price of them combined should be equal to the original bond’s price
What is the advantage of municipal bonds?
They are tax-free
What is the formula for finding the rate of a municipal bond?
r = taxable r * (1-MTR)
r = mun. rate
taxable r = corp. rate
MTR = marginal tax rate
What are the 2 types of municipal bonds?
- General obligation bonds (backed by municipality’s credit worth)
- Revenue bonds (collaterized by the project)
What are financial guarantees for bonds?
debt issuers get backed by insurance companies to lower the risk of their debt
What are credit default swaps?
Protects debt buyer from default risk.
What problems arise from credit swaps?
Might result to unnecessary defaults
What drives bond prices?
- Market conditions
- Ratings
- Age of the Bond
