Topic 5: Bond Markets Flashcards
Equity
A share or an ownership interest in a company. This can be on a public market (e.g. the London stock exchange) or in a private company (e.g. a family business)B
Bond Prices; Clean Price
The price of bonds are generally quoted net of any accrued interest or coupon
Bond Prices; Dirty price
The amount you pay for the bond will include any accrued interest or coupon
Positive Yield to Maturity
If you invest your money in bonds in normal times you expect to earn a positive, if modest rate of return. Meaning positive YTM on the bond.
Credit ratings on bonds
AAA - A bond with minimal risk of default
BB - A more speculative non-investment grade ‘junk bond’ with a high level of default risk
D - A bond that is actually in default
The lower the rating the lower the default risk.
Real rate
Interest rate or rate of return that has been adjusted for inflation
The percentage change in your buying power
Nominal Rate
Interest rate or rate that has not been adjusted for inflation.
The percentage change in the amount of cash you have.
The term structure of Interest rates
The relationship between nominal interest rates on default-free, pure discount bonds and the time to maturity.
In other words it is the pure time value of money.
(A sequence when yield of bond gets higher with a longer period to maturity.)
Inflation Premium
The portion of a nominal interest rate that represents compensation for expected future inflation.
Upward Sloping term structure:
When the economy is growing, prices rise leading to inflation therefor increasing inflation premium.
Downward sloping term structure:
When economy is shrinking prices stay flat or fall, therefor leads to low levels of inflation or even deflation. This leads to a decreasing inflation premium and an inverted yield curve.
Interest Rate Risk premium
The compensation investors demand for bearing interest rate risk.
