Topic 3 Bonds Flashcards
(22 cards)
What is a bond?
A bond is a debt security where the borrower (issuer) borrows money from the lender (bondholder) and agrees to pay it back with interest at a future date.
What are the basic characteristics of a bond?
A bond has face value (principal), maturity, coupon, and market price.
What is the face value of a bond?
The face value is the amount that will be paid back by the issuer to the holder upon bond redemption.
What is the maturity of a bond?
The maturity of a bond is the length of time until the bond’s face value is paid back, which can range from a few months to many years.
What is the coupon of a bond?
The coupon is the periodic payment from the issuer to the bondholder, expressed as a percentage of the face value.
What does the price of a bond represent?
The price of a bond reflects what buyers and sellers are willing to pay in the market, and it may be above or below the face value.
What is a bond trading at par?
A bond is trading at par when its market price is equal to its face value.
What is a bond trading at a premium?
A bond is trading at a premium when its market price is above its face value.
What is a bond trading at a discount?
A bond is trading at a discount when its market price is below its face value.
What is bond pricing based on?
Bond pricing is based on present value discounting techniques, where future payments are discounted at an appropriate rate.
What are some variants of bonds?
Some bond variants include perpetual bonds, zero-coupon bonds, callable bonds, convertible bonds, and inflation-linked bonds.
What is a zero-coupon bond?
A zero-coupon bond pays no periodic coupon and is redeemed for its face value at maturity.
What is a callable bond?
A callable bond can be redeemed by the issuer before its maturity date, usually at a premium.
What is a convertible bond?
A convertible bond can be converted into equity under certain conditions.
What is the relationship between bond prices and interest rates?
Bond prices and interest rates move inversely: when interest rates rise, bond prices fall, and vice versa.
What is current yield?
Current yield is the bond’s annual coupon payment divided by its market price.
How is yield to maturity (YTM) calculated?
YTM is calculated as the discount rate that equates the present value of a bond’s future cash flows (coupon payments and face value) to its current market price.
What is the typical use of YTM?
YTM is commonly used to express a bond’s total return, reflecting both coupon payments and capital gains or losses upon redemption.
What happens to bond prices when interest rates increase?
When interest rates increase, bond prices typically fall, leading to a decrease in their market value.
What are yield spreads?
Yield spreads represent the difference between the yields of different bonds, often compared to a benchmark bond like government bonds.
What are sovereign bond yield spreads?
Sovereign bond yield spreads refer to the difference in yields between government bonds of different countries, often compared to highly rated bonds like German or US Treasuries.
What is the role of central banks in the bond market?
Central banks influence bond prices and yields by setting interest rates, which affect the cost of borrowing for governments and corporations.
