Week 4: Bond Markets

Question 1

What is the main difference between the money and capital markets?

Answer 1

Capital market seurities tend to have longer maturities ( > 1 year)

Question 2

Rank Treasure bills, bonds, and notes, from shortest to longest maturity

Answer 2

1. bills < 1 year
2. notes < 1-10 years
3. bonds > 10-30 years

Question 3

What are Treasury Inflation-Protected Securities (TIPS)?

Answer 3

principal amount is tied to the current inflation rate to protect purchasing power

Question 4

What are Treasury Inflation-Protected Securities (TIPS)?

Answer 4

principal amount is tied to the current inflation rate to protect purchasing power

Question 5

What are Treasury STRIPS?

STRIPS=Separate Trading of Registeted Interest and Principal Securities

Answer 5

Coupon & principal amounts stripped from T-bond and sold as individual 0-coupon bonds. The price of them combined should be equal to the original bond’s price

Question 5

What is the advantage of municipal bonds?

Answer 5

They are tax-free

Question 6

What is the formula for finding the rate of a municipal bond?

Answer 6

r = taxable r * (1-MTR)

r = mun. rate
taxable r = corp. rate
MTR = marginal tax rate

Question 7

What are the 2 types of municipal bonds?

Answer 7

• General obligation bonds (backed by municipality’s credit worth)
• Revenue bonds (collaterized by the project)

Question 8

What are financial guarantees for bonds?

Answer 8

debt issuers get backed by insurance companies to lower the risk of their debt

Question 9

What are credit default swaps?

Answer 9

Protects debt buyer from default risk.

Question 10

What problems arise from credit swaps?

Answer 10

Might result to unnecessary defaults

Question 11

What drives bond prices?

Answer 11

• Market conditions
• Ratings
• Age of the Bond