Bonds

Question 1

Define a bond

Answer 1

IOUs that allow companies/ governments to borrow money from investors

Question 2

Define a debtor

Answer 2

The one who issues the bond

Question 3

Define a creditor

Answer 3

The one who holds the bond

Question 4

Define a maturity date

Answer 4

The agreed date the debtor will repay the bond holder the money borrowed

Question 5

Define a ‘yield to maturity’

Answer 5

The overall return to the investor if the bond was purchased today and held until maturity

Question 6

What is the formula used to calculate;ate the coupon rate

Answer 6

• The annual coupon payment / bond face value
• the total sum of annual coupons / initial price of bond x 100

Question 8

What happens to bond rates when market interest rates increase?

Answer 8

The bond price decreases

Question 9

Outline reasons why bonds differ between countries

Answer 9

Inflation risk
- countries with higher actual expected inflation will have higher bond yields to compensate for the expected loss of real purchasing power

Default risk
- countries with higher national debt or persistently large fiscal deficits will usually have higher bond yields as investors demand compensation for the increased risk of default

Question 10

What are the effects of a rise in bond yields on government debt?

Answer 10

Debt service costs
- higher interest rtes to be payed on outstanding debts
- financial resources may be reduced for education, NHS and other priority areas

Currency appreciation
- may attract inflows of financial capital from oversees
- this could help control imported inflation but might worsen the price competitiveness of export sectors

Question 11

Define hot money

Answer 11

Money from oversees

Question 12

Define nominal value

Answer 12

How much something is worth

Question 13

Define the market price

Answer 13

The price that is made depending on the market forces of supply and demand