chapter 6: bond valuation and interest rates part 2 Flashcards

1
Q

are interest rates inversely related to bond prices?

A

yes

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2
Q

when bond prices increase what happens to interest rates?

A

interest rates decrease

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3
Q

when bond prices decrease what happens to interest rates?

A

interest rates increase

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4
Q

what are the factors affecting bond prices

A

the relationship between the coupon rate and bond’s yield to maturity (YTM) determines if a bond will sell at a

  1. premium
  2. discount or
  3. at par
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5
Q

if the coupon rate is greater than YTM

A

the price will be greater than face value

= discount

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6
Q

if the coupon rate = YTM

A

price will = Face value

at par

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7
Q

if the coupon rate is less than YTM

A

price is less than face value

premium

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8
Q

what are the factors affecting bond prices

A

1 . YTM

  1. time to maturity
  2. size of coupon
  3. interest rate risk and duration
    - –
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9
Q

what affects to volatility of a bond

A

time to maturity and size of the coupon

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10
Q

when bond prices increase what happens to YTM

A

YTM decreases

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11
Q

when bond prices decrease what happens to YTM

A

YTM increases

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12
Q

what is the price-YTM relationship

A

it is convex

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13
Q

because the price -YTM relationship is convex, the price ….

A

rise due to a fall in YTM is greater than the price decline due to a rise in YTM given an identical change in YTM

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14
Q

for a given change in YTM, bond prices will change more when

A

interest rates are low than when they are high

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15
Q

what is volatility

A

Volatility is the pace at which prices move higher or lower,

Commonly, the higher the volatility, the riskier the security.

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16
Q

when speaking about time to maturity, which maturity bonds have a greater price volatility (long-maturity or short maturity)

A

long-maturity bonds

the longer the bond, the longer the period for which the cash flows are fixed

17
Q

how does the size of the coupon affect the bond prices

A

low coupon bonds - have greater price volatility than higher coupon bonds

18
Q

why are high coupon bonds les volatile than low coupon bonds

A

because they act like a stabilizing device
- since a greater proportion of the bond’s total cash flows occur closer to today and are therefore their present value is less affected by a change in YTM

19
Q

the sensitivity of a bond’s price to change in interest rates is a measure of what

A

of the bond’s interest rate risk

20
Q

interest rate risk is affected by what

A
  1. YTM
  2. term to maturity
  3. size of coupon
21
Q

duration measure of interest rate risk

A
  1. as a change in price for a given change in interest rate

2. the higher the bond’s duration, the more sensitive its price is to changes in interest rates

22
Q

a bond’s duration will be higher if its …….

A

YTM is lower
term to maturity is longer
coupon is lower

23
Q

what is the quoted price

A

the price reported by the media

24
Q

what is the cash price

A

the price paid by an investor, and includes both

1. the quoted price plus any interest that has accrued since the last coupon payment date

25
Q

what is the YTM

A

it is the discount rate used for bond valuation

26
Q

YTM is the yield an investor would earn if

A
  1. she purchases the bond at the current market price
  2. she holds the bond to maturity
  3. she reinvests all the coupons paid by the bond at the YTM
27
Q

what is IRR

A

internal rate of return which is the YTM

28
Q

ytm is therefore the bond’s

A

internal rate of return IRR

29
Q

YTm is also the

A

discount rate that causes the PV of the bond’s future cash flows to equal its current price

30
Q

how do you solve YTM

A

(2nd) (CLRTVM) 30 (PMT) - 1030 (PV) 1000 (FV) 40 (N) (CPT) (I/Y) =
then multiply by 2 to annualize

31
Q

why do you enter the price as a negative number

A

because it is a cash outflow to purchase the bond

32
Q

why do you enter the coupon and principal payments as positive numbers

A

these are cash inflows