Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

BUS149 - Foundations Of Finance > Lecture 8 > Flashcards

Lecture 8 Flashcards

(65 cards)

Start Studying
1
Q

bond = ?

A

an agreement between lenders and the borrowing organisation (typically a firm or government body)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

are lenders also bondholders?

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

do lenders/bondholders have advantages over shareholders?

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

why do bondholders have advantages over shareholders?

A

shareholders will lose the value of their investment if the firm went bust

however bondholders are obliged to be paid regardless of bankruptcy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

do bondholders have voting rights?

A

no

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

par value/face value = ?

A

the principal amount that the issuer is obligated to pay at maturity date

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

coupon rate = ?

A

annual rate on a bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

coupon payment = ?

A

interest payment on a bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

annual coupon = ?

A

coupon rate x par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

maturity = ?

A

the specified date on which the principal amount of a bond is paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

trust indenture = ?

A

an extensive document between a bond issuer and a trustee

details the provisions and covenants of the loan arrangement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

how do bonds work?

A

when a company wants to raise funds, they allow various people to give the firm loans in the form of bonds

the investors give loans to the firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what are various provisions of a bond loan arrangement?

A

par value
maturity date
coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

trustee = ?

A

represents the bondholders to ensure the bond issuer respects the indenture’s provisions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

covenants = ?

A

outlines that impose restrictions or extra duties on the firm

promises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what do bond ratings do?

A

they assess the ability of the issuer to make timely payments of interest and principal

they show the risk/quality associated with the bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

investment grade bonds = ?

A

bonds with Baa3, BBB- or better

they have lower risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

junk bonds = ?

A

rated Ba1, BB+ or lower

they have higher risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

what does moody’s bond ratings look like?

A

Aaa, Aa1, Aa2….Baa1, Baa2….Caa, a, C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what does S&P and Fitch’s bond ratings look like?

A

AAA, AA+, AA….BBB+, BBB….CCC, CC, C, D

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

“coupon ticker: ford motor credit (F)” = ?

A

the firm’s ticker symbol ‘F’ symbolises ford motor credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

“coupon: 7.000” = ?

A

coupon rate is 7%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

“maturity: 2027” = ?

A

bond matures in 2027

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

“last price: 117.26” = ?

A

bond’s closing price as a percentage of par value is 117.26%

e.g, par value is £1000, 117.26% * £1000 = £1172.60 closing price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
"last yield: 3.76" = ?
an estimate of the investor's return on the bond if it was purchased today and held to maturity last yield was 3.76%
26
"spread: 236" = ?
the difference between the yield to maturity on the bond and a similar US treasury bond is 236 basis points (2.36%)
27
"UST: 5" = ?
the maturity length of a similar US treasury bond is 5 years
28
"est. $ vol (000s): 230,068"
expected trading volume of the bond is $230,068,000
29
what information is quoted for corporate bonds?
company ticker symbol coupon rate maturity date last price last yield spread UST est. vol
30
what information is quoted on treasury bonds?
coupon rate maturity mo/yr bid price asked price % chg. asked yield
31
"rate: 4.000" = ?
coupon rate for the bond is 4% of par value
32
"maturity mo/yr: feb 27" = ?
bond matures in February 2027
33
"bid: 100:27" = ?
the price to buy the bonds is 100 27/32% of of par e.g., par value = £1000, bid price is £1008.44 27/32% + 100% * £1000 = £1008.44
34
"asked: 100:28" = ?
the price to sell the bonds is 100 28/32% of par e.g., par value = £1000, asked price is £1008.75 28/32% + 100% * £1000 = £1008.75
35
bid-ask spread = ?
represents dealer profit, the difference between the bid and ask price
36
spreads often indicate...?
how liquid a security is the narrower the bid-ask spread, the greater the liquidity (& usually greater trading volume)
37
"chg.: -1" = ?
change in price was -1/32 of a percentage point
38
"asked yld: 1.95" = ?
yield to maturity on asked price is 1.95%
39
price of an asset = ?
present value of future expected cash flows cf/1+r + cf/1+r to the power of 2 + cf/1+r to the power of 3 + cf/1+r to the power of 4 etc...
40
the value of a bond with annual coupon payments = ?
bond value = present value of the coupons + present value of the par value coupon payment cf/(1+r) to the power of 0 + coupon payment cf/(1+r) to the power of 1 + face value + coupon/(1+r) to the power of 2
41
price = ?
the bond's value in period zero
42
CF = ?
the coupon payment
43
par value = ?
the bond's principal amount
44
r = ?
the rate of return required by investors on this quality risk-class of bonds interest rate
45
intrinsic value = ?
the maximum price to pay for an asset the best estimate of the economic value of an asset based on a forecast of future cash flows and an estimate of the appropriate discount rate
46
what is the equation if coupons are paid semi-annually?
r is the semi-annual discount/compound rate r/2 YTM (using APR) = r x 2; YTM/2 = r n = # of years to maturity x 2
47
suppose a semi-coupon bond has a $1,000 par value, coupon rate 8% paid once per year and 10 years until maturity. The YTM is 10%, What is the bond price?
r = YTM (10%) / 2 = 5% n = 10 x 2 = 20 pv coupons = $1000 x 1.08 = $80 / 2 = $40 ... $40 x ((1-1/1.05 to the power of 20) / 0.05) = $498.49 pv face value = $1000/1.05 to the power of 20 = $376.89 total bond value = 498.49 + 376.89 = $875.38
48
bond value < face value = ?
sell at discount
49
bond value > face value = ?
sell at premium
50
suppose a semi-coupon bond has a $1,000 par value, coupon rate 8% paid once per year and 10 years until maturity. The YTM is 6%, What is the bond price?
r = YTM/2 = 3 n = 10 x 2 = 20 pv coupons = 1000 x 1.08 = 80/2 = 40; 40 x ((1-1/1.03 to the power of 20)/0.03) = 595.1 pv face value = 1000/1.03 to the power of 20 = 553.68 total bond value = 553.68 + 595.1 = 1148.78
51
suppose a semi-coupon bond has a $1,000 par value, coupon rate 8% paid once per year and 10 years until maturity. The YTM is 8%, What is the bond price?
r = YTM/2 = 4% n = 10 x 2 = 20 pv coupons = 1000 x 1.08 = 80/2 = 40; 40 x ((1-1/1.04 to the power of 20)/0.04) = 543.61 pv face value = 1000 / 1.04 to the power of 20 = 456.39 total bond value = 456.39 + 543.61 = 1000
52
interest rate risk = ?
fluctuating interest rates lead to varying asset prices
52
bond value = face value = ?
sell at face value
52
rising interest rates have what impact on bond prices?
rising interest rates lead to falling bond prices
53
falling interest rates have what impact on bond prices?
falling interest rates lead to rising bond prices
54
what is the relationship between interest rates and bond prices described as?
the seesaw effect
55
when everything else is equal, the longer the time to maturity... has what impact on interest rate risk?
the longer the time to maturity, the higher the interest rate risk
56
when everything else is equal, the lower the coupon rate... has what impact on interest rate risk?
the lower the coupon rate, the greater the interest rate risk
57
what are the 3 types of US government bonds?
treasury bill treasury note treasury bond
58
treasury bill = ?
debt instrument issued by the us government and has less than 1 year maturity
59
treasury note = ?
debt instrument issued by the US government and has between 1-10 year maturity
60
treasury bond = ?
debt instrument issued by the US government and has more than 10 year maturity
61
what impact does interest rate risk have on investors' demands?
investors will demand a larger risk premium for bonds whose price is especially sensitive to interest rate changes (higher interest rate risk)
62
horizon risk premium = ?
additional expected return to compensate for risk associated with investing in a longer-term bond with the same credit risk as a shorter-term bond
63
what's the difference in YTM between long term bonds with low coupon rates and short-term bonds with high coupon rates?
expect higher yields to maturity (YTM) for long term bonds with low coupon rates than for short-term bonds with high coupon rates

BUS149 - Foundations Of Finance (19 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions