Ch. 2, Corp and Municipal Debt Securities | Day 2 Flashcards
(15 cards)
What is the nominal yield of a bond?
The nominal yield is the bond’s fixed interest rate (coupon rate) stated as a percentage of par value, set at issuance and never changes.
How is the current yield of a bond calculated?
Current yield = Annual income ÷ Current market price.
What happens to current yield when a bond is purchased at a premium?
The current yield is lower than the nominal yield because the bond is bought at a higher price than par.
What is the relationship between bond prices and yields?
Bond prices and yields move inversely—when prices go up, yields go down, and vice versa.
What does yield to maturity (YTM) represent?
YTM is the total annualized return an investor earns if the bond is held to maturity, accounting for coupon income and the gain or loss from buying at a discount or premium.
Why is yield to maturity considered the most important yield?
It reflects the total return on the bond, including interest payments and capital gains or losses, assuming reinvestment at the same rate.
What happens to YTM when a bond is purchased at a premium?
The YTM is the lowest of all yields (nominal, current, YTM) because the investor pays more than par and receives only par at maturity.
What happens to YTM when a bond is purchased at a discount?
The YTM is the highest yield because the investor pays less than par but still receives the full par value at maturity.
What is the effect of callable bonds on yield calculations?
Callable bonds can affect returns; if called early, the yield to call (YTC) replaces YTM in importance, especially if the bond is called at a premium or discount.
How does yield to call compare when a bond is called at par?
Yield to call will always be lower than yield to maturity if the bond is called at par before maturity.
What is the yield to call for a bond bought at a premium likely to be?
The lowest possible yield, even lower than the YTM, due to early redemption at or near par.
What is realized compound yield and how is it different from YTM?
Realized compound yield considers semiannual compounding and reinvestment of interest payments, giving a more accurate return based on actual reinvestment rates.
What is a yield spread, and what can it indicate about the economy?
A yield spread is the difference in yields between two bonds; widening spreads suggest recession, while narrowing spreads may indicate economic improvement.
How is the real interest rate calculated?
Real interest rate = Nominal interest rate − Inflation rate.
What is the difference between term, serial, and balloon bond maturities?
Term maturity: Entire principal due on a specific date.
Serial maturity: Portions of the issue mature at regular intervals.
Balloon maturity: Some principal is repaid over time, but a large portion is due at the end.
