midterm Flashcards
(32 cards)
What is a bond?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower.
List the types of bonds
- Government bonds
- Corporate bonds
- Municipal bonds
- Zero-coupon bonds
- Convertible bonds
Define coupon
The coupon is the interest payment made to bondholders, typically expressed as a percentage of the bond’s par value.
What is yield to maturity (YTM)?
YTM is the total return anticipated on a bond if it is held until it matures.
Define par value
Par value is the face value of a bond, which is the amount paid back to the bondholder at maturity.
What is a discount bond?
A discount bond is a bond sold for less than its par value.
What is a premium bond?
A premium bond is a bond sold for more than its par value.
How do you calculate bond value?
Bond value can be calculated using the present value of future cash flows, which include the coupon payments and the par value at maturity.
Why is YTM preferred as a metric?
YTM is preferred because it provides a comprehensive measure of the bond’s return, considering all cash flows and the time value of money.
Define a convertible bond
A convertible bond is a type of bond that can be converted into a predetermined number of the company’s equity shares.
What is a zero-coupon bond?
A zero-coupon bond is a bond that does not pay periodic interest and is sold at a discount to its face value.
Define a TIP bond
A TIP bond is a Treasury Inflation-Protected Security that adjusts its principal value based on inflation.
What is the yield curve?
The yield curve is a graphical representation of the relationship between interest rates and the time to maturity of debt securities.
What is a realized yield?
Realized yield is the actual return earned on a bond, accounting for any price changes and interest payments.
Define interest rate risk
Interest rate risk is the risk that changes in interest rates will affect the value of bonds.
What is a call provision?
A call provision is a feature that allows the issuer to redeem the bond before its maturity date.
What is marketability?
Marketability refers to the ease with which a bond can be bought or sold in the market.
What are bond ratings?
Bond ratings are evaluations of the creditworthiness of a bond issuer, indicating the likelihood of default.
What is holding period return?
Holding period return is the total return received from holding an asset over a specified period.
How do you calculate expected return?
Expected return is calculated as the weighted average of possible returns, where the weights are the probabilities of each return.
What is standard deviation?
Standard deviation is a statistic that measures the dispersion of a set of values relative to its mean.
What is variance?
Variance is a measure of the variability of returns from the mean return.
What are the benefits of diversification?
Benefits of diversification include reduced risk and more stable returns.
What is systematic risk?
Systematic risk is the risk inherent to the entire market or market segment that cannot be mitigated through diversification.
