Week 3 Flashcards
(26 cards)
What do bonds provide?
- Ownership protection
- Lower interest rate as
compared to banks - Long-term borrowing from
financial markets
Who are bonds are issued by?
- Companies
- Public bodies
- Governments
What is the face value (Principal)?
◦ Notional amount used to compute the interest payments
What is maturity date?
◦ Final repayment date
What does term mean?
◦ The time remaining until the repayment date
What does a coupon mean?
◦ Promised interest payments
What does coupon rate mean?
◦ Determines the amount of each coupon payment, expressed as an APR
What is the coupon payment formula?
CPN = (Coupon rate x Face value)/ Number of Coupon Payments per Year
What is a zero-coupon bond?
This is the simplest type of bond as it does not have a coupon. It
only pays the principal at maturity
What is a pure discount bond?
type of bond that sells at a discount (a price lower than face value)
What are Treasury bills?
are U.S. government zero-coupon bonds with a maturity
of up to one year.
What is a yield to maturity?
◦ The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond.
What is the price of a zero-coupon bond equation?
P = FV/ (1+YTM↓n)^n
What is Yield to Maturity of an n-Year Zero-Coupon Bond equation?
YTM↓n = (FV/P)^(1/n) - 1
What does the law of One Price guarantee?
◦ A default-free zero-coupon bond that matures on date n provides a risk-free return over the same period.
◦ Thus, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity on such a bond
What is the Risk-Free Interest Rate with Maturity (n) equation?
r↓n= YTM↓n
What is a coupon bond?
◦ Pay face value at maturity and Pay regular coupon interest payments
What are treasury notes?
◦ U.S. Treasury coupon security with original maturities of 1–10 years
What are treasury bonds?
◦ U.S. Treasury coupon security with original maturities over 10 years
What does it mean when a bond is at a discount?
◦ A bond is selling at a discount if the price is less than the face value.
What does it mean when a bond is at a par?
◦ A bond is selling at par if the price is equal to the face value
What does it mean when a bond is at a premium?
◦ A bond is selling at a premium if the price is greater than the face value.
What is the relationship between interest rate and bonds prices?
There is an inverse relationship
between interest rates and bond prices.
◦ As interest rates and bond yields rise, bond prices fall.
◦ As interest rates and bond yields fall, bond prices rise.
what is a corporate bond yield
A corporate bond yield refers to the return an investor can expect to earn from holding a corporate bond until maturity. It is expressed as an annual percentage rate (APR) and is calculated based on the bond’s coupon payments and its current market price.
