Ch. 3 - Bonds Flashcards
Financial Instrument
Something that has monetary value (can be exchanged for finances)
Financial Security
Financial instruments that are negotiable (has an agreed upon cost through conversation) and fungible (can be replaced by another identical)
In the event a firm goes bankrupt, who gets paid first?
Debt holders are paid before shareholders in the event a firm goes bankrupt
Which markets are bigger: debt markets or equity (stock) markets?
Debt markets are bigger than equity markets. Transactions of $10 million are small in debt markets (but large in stock markets)
Banker’s Acceptance
A form of payment that is guaranteed by a bank rather than an individual account holder
Commercial Paper
A form of unsecure, short-term debt instrument issued by corporations used for the financing of payroll, AP, inventories, and meeting other short-term obligations
Stripping
Separating interest payments from principal
Reconstituting (Reassembling)
Bundle together separated interest and principal payments
Zero-Coupon Bonds
Any lump of money without any interest payments
True or False: The value of a bond is measured by its present value (PV).
False. Bonds are measured using face value, NOT present value (PV)
Yield to Maturity
The total return anticipated on a bond if the bond is held until it matures
What is the relationship between bond prices and yields (R)?
Prices move in opposite direction to yields (inverse relationship)
What is the relationship between time (number of periods) and yield changes?
Longer tenors are affected more by yield changes. Observe that the last period has a present value of (PMT + FV) / (1 + R)^N.
YTM < Coupon Rate
Premium
YTM = Coupon Rate
At Par
