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Flashcards in Bond Market Deck (18)
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prime rates

The basic interest rate on
short-term loans that the
largest commercial banks
charge to their most creditworthy
corporate customers.


Federal funds rate

Interest rate that banks charge
each other for overnight loans of
$1 million or more .


call money rate

The interest rate brokerage firms
pay for call money loans, which
are bank loans to brokerage firms.
This rate is used as the basis for
customer rates on margin loans


commercial paper

Short-term, unsecured debt issued
by large corporations.



IOU that obligates the issuer to pay the bondholder a fi xed sum of money at the
bond’s maturity along with constant, periodic interest payments during the life of the bond



have a conversion feature that grants bondholders the right to convert their bonds into
shares of common stock of the issuing corporation.


“putable” bonds

have a put feature that grants bondholders the right to sell their bonds back to the issuer at a
prespecified price.


coupon rate

A bond’s annual coupon divided by
its par value. Also called coupon
yield or nominal yield.


current yield

A bond’s annual coupon divided by
its market price.


calculating bond's price given its yield

bond price = coupon/ YTM [1-(1/(1+YTM/2^2M))] + FV/(1+YTM/2)^2M

C = Annual coupon, the sum of two semiannual coupons
FV = Face value
M = Maturity in years
YTM = Yield to maturity

The price of the bond is the sum of the present values of coupons and principal


Premium bonds

Bonds with a price greater than par value are said to be selling at a
premium. The yield to maturity of a premium bond is less than its coupon rate.


Discount bonds

Bonds with a price less than par value are said to be selling at a discount.
The yield to maturity of a discount bond is greater than its coupon rate.


Par bonds.

Bonds with a price equal to par value are said to be selling at par. The
yield to maturity of a par bond is equal to its coupon rate.


Yield To Maturity (YTM)

the total return anticipated on a bond if the bond is held until it matures

Calculations of yield to maturity (YTM) assume that all coupon payments are reinvested at the same rate as the bond’s current yield, and take into account the bond’s current market price, par value, coupon interest rate, and term to maturity. YTM is a complex but accurate calculation of a bond’s return that can help investors compare bonds with diff


difference between ytm and current yield

Yield to maturity is very similar to current yield, which divides annual cash inflows from a bond by the market price of that bond to determine how much money one would make by buying a bond and holding it for one year. Yet, unlike current yield, YTM accounts for the present value of a bond’s future coupon payments. In other words, it factors in the time value of money, whereas a simple current yield calculation does not.

Read more: Yield To Maturity (YTM) | Investopedia
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A widely used measure of a bond prices’s
sensitivity to changes in bond
Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. If a bond has a duration of 6 years, for example, its price will rise about 6% if its yield drops by a percentage point (100 basis points), and its price will fall by about 6% if its yield rises by that amount.


yield to worst (YTW)

lowest potential yield that can be received on a bond without the issuer actually defaulting
givens investors the wrost case senario


yield to call

The yield to call tells you the total return you would receive if you were to buy and hold the security until the call date. As an investor, you should be aware that this yield is valid only if the bond is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date, and the market price of the bond