Topic 8 - Bonds

Question 1

What is a Bond

Answer 1

A debt security issued by a government or corporation to borrow money

(interest only loan where the borrower pays interest periodically and repays the principal at maturity)

Question 2

How do you calculate the Coupon Rate of a bond

Answer 2

Annual coupon payment divided by the bond’s face value

Question 3

What is a bond’s Maturity and Time to maturity

Answer 3

Maturity - date on which the face value is repaid
Time to maturity - number of years until it is repaid

Question 4

What are different types of government issued Bonds (2)

Answer 4

National governments issue Treasury bills, bonds or notes

State or local governments issue municipal bonds (muis)

Question 5

What is a Discount bond

Answer 5

When a bond is sold for less than its face value

Question 6

What is a Premium bond

Answer 6

A bond that sells for more than its face value

Question 7

What is the Current yield of a bond

Answer 7

Current Yield = Annual Coupon / Current Price

Question 8

What is Interest Rate Risk

Answer 8

The risk to bond owners due to changes in interest rates

Question 9

When is a Bond more Sensitive to Interest Rate Changes

Answer 9

1. The longer the time to maturity
2. The lower the coupon rate