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Asset Exam 2 > Chapter 2&10 (Bonds) > Flashcards

Chapter 2&10 (Bonds) Flashcards

1
Q

Bankers’ Acceptance

A

An order to a bank by a customer to pay a sum of money at a future date.

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2
Q

Call Option

A

The right to buy an asset at a specified exercise price on or before a specified expiration date.

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3
Q

Certificate of Deposit

A

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

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4
Q

Commercial Paper

A

Short-term unsecured debt issued by large corporations.

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5
Q

Common Stocks

A

Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends.

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6
Q

Corporate Bonds

A

Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.

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7
Q

Derivative Asset

A

A security with a payoff that depends on the prices of other securities.

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8
Q

Equally Weighted Index

A

An index computed from a simple average of returns.

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9
Q

Eurodollars

A

Dollar-denominated deposits at foreign banks or foreign branches of American banks.

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10
Q

Federal Funds

A

Funds in the accounts of commercial banks at the Federal Reserve Bank.

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11
Q

Futures Contract

A

Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date.

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12
Q

London Interbank Offer Rate (LIBOR)

A

Lending rate among banks in the London market.

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13
Q

Market Value-Weighted Index

A

Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value.

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14
Q

Money Markets

A

Include short-term, highly liquid, and relatively low-risk debt instruments.

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15
Q

Municipal Bonds

A

Tax-exempt bonds issued by state and local governments.

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16
Q

Preferred Stock

A

Nonvoting shares in a corporation, usually paying a fixed stream of dividends.

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17
Q

Price-Weighted Average

A

An average computed by adding the prices of the stocks and dividing by a “divisor.”

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18
Q

Put Option

A

The right to sell an asset at a specified exercise price on or before a specified expiration date.

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19
Q

Repurchase Agreements (Repos)

A

Short-term sales of government securities with an agreement to repurchase the securities at a higher price.

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20
Q

Treasury Bills

A

Short-term government securities issued at a discount from face value and returning the face amount at maturity.

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21
Q

Treasury Notes or Bonds

A

Debt obligations of the federal government with original maturities of one year or more.

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22
Q

What determines the price of a bond?

A

Present value of the promised payments

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23
Q

What characterizes a bonds yield to maturity? 2

A
  • discount rate

- average rate of return

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24
Q

A junk bond is characterized based on …

A

Credit Rating

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25
Q

when will a firm call its bonds?

A

When interest rates fall

26
Q

What should a zero coupon bond experience over its life?

A

Appreciation.

27
Q

Bond Characteristics. 2

A
  • Fixed income investments
  • Security that obligates issuer to make fixed payments to holders over time
    - periodical interest usually paid semiannually
28
Q

Benefits of a bond in a Portfolio. 6

A
  • Diversification
  • Weak correlation with stock.
  • lower stand. Dev. than equities/ fewer losses.
  • Dividend Clientele
  • Higher return than CD’s or Savings Accounts.
  • Some have Tax Advantages
29
Q

Face (Par) Value

A

Principle of Bond

30
Q

Coupon Payment

A

Interest Payment

31
Q

Coupon Rate

A

interest payment per dollar of par value

32
Q

Maturity

A

When you receive the principle

33
Q

Price of Bond

A
  • How much you pay fo da bond

- present value of coupon payments and principles

34
Q

Yield to Maturity

A
  • Actual Return

- the discount rate

35
Q

Credit Rating

A

the default risk of a bond

36
Q

How does a rise in market interest rate effect bond prices?

A

Prices of Bonds fall, opposite correlation to market interest rate

37
Q

What is the primary source of bond market risk?

A

Interest Rate Fluctuations

38
Q

Par Bond

A

when price= face valueor coupon rate = yield to maturity

39
Q

Premium Bond

A

when price> face valueor coupon rate> face value

40
Q

Discount Bond

A

when price< face value or coupon rate< face value

41
Q

Who establishes Credit Ratings?

A

Moody’s, S&P, Fitch

42
Q

What classifies as an investment grade bond?

A

S&P- BBB or aboveMoody’s - Baa or above

43
Q

What classifies as a junk bond

A

S&P - BB or lowerMoody’s - Ba or lower OR unrated :)

44
Q

Corporate bonds

A
  • issued by corporations
  • call feature: allows issuer to redeem bond prior to maturity
  • convertible feature: holders have the option of converting to stock
45
Q

Municipal Bonds

A

-issued by municipalities - nontaxable at the federal, state, & local level if you live in the state.

46
Q

Risk of Bonds. 5

A
  • credit risk
  • interest rate risk
  • exchange rate risk (if foreign bonds)
  • inflation risk
  • call risk (firm will buy back bond)
47
Q

Types of Bonds. 3

A
  • treasury bonds
  • corporate bonds
  • municipal bonds
48
Q

What is invoice price

A

Flat price + Accrued interest

49
Q

Expectations Hypothesis

A

yields to maturity determined solely by expectations of future short-term interest rates or inflation rate

50
Q

Liquidity Hypothesis

A

Investors demand a risk premium on long-term bonds

51
Q

Interest rate sensitivity

A
  • Bond prices and yields are inversely related
  • Long-term bond prices more sensitive to interest rate changes than short-term bonds
  • as maturity increases, sensitivity of bond prices to changes in yields increases at decreasing rate
  • low coupon bonds are more sensitive to interest rates
52
Q

What is duration?

A

How sensitive bonds are to interest risk

53
Q

Zero coupon bond

A

duration=time to maturity

54
Q

Immunization

A

-Strategy to shield net worth from interest rate movement -two of setting interest rate risk; price risk and reinvestment rate-match the duration with the investment horizon

55
Q

Bond Swaps

A
  • managing bond portfolio by selling some bonds and buying others
  • benefits include tax treatment (loss now gains later), yield, and maturity structure
56
Q

Bullets

A

Mainly use zero-coupon bond-cash flow matching-generate cash outflow in a certain date

57
Q

Barbells

A

-owning both short and long-term bond

58
Q

Laddered Strategy

A
  • Cash management: relatively liquid

- reduce interest risk (hold bonds until maturity)

59
Q

Convexity

A

-curvature of price yield relationship of bond

60
Q

How are Stocks Weighted? 3

A
  • Price Weighted (DJIA)
  • Market Value Weighted (S&P 500, NASDAQ)
  • Equally Weighted
61
Q

Value Weighting Implications. 2

A
  • larger stocks dominate index

- Performance characteristics reflect size

62
Q

Equal/Price Weighting Implications. 3

A
  • Smaller Stocks are more important
  • Tend to be more volatile, Higher Beta
  • Higher expected return

Asset Exam 2 (6 decks)

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