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42 Cards in this Set
- Front
- Back
What are the two components of a bond |
Stream of interest payments over the life of the bond Final Principal Repayment. |
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If interest rates move up, the percentage downward price movement of bonds, ranked from from greatest percentage to least. |
Large Discount Bond (lowest coupon) Small Discount Bond Par Bond Small Premium Bond Large Premium Bond (highest coupon) |
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Bonds with low coupon rates tend to trade at a |
Discount |
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What is the relationship between the length of maturity on a bond and its duration |
The longer the maturity, the greater the duration |
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What is the relationship between the coupon rate of a bond and its duration? |
The lower the coupon rate, the higher the duration. |
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Definition of Nominal Yield |
the stated rate of interest on a bond |
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Definition of Current Yield |
A yield that takes into account the market price of the bond. |
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What is the formula for Current Yield |
Annual Interest in Dollars / Bond's Market Price |
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Yield to Maturity takes into account.. |
market price of the bond as well as any capital gains or losses on the bond, if held to maturity. |
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Will Yield to Maturity be greater than Current Yield for a discount bond or a premium bond? Why? |
Discount Bond YTM is highest for a discount bond because it reflects that the bond is being purchased for less than par and it reflects the annual earnings of the bond discount as part of the investment return. |
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What does it mean by Amortization of the Bond Preium |
when a bond is purchased at a premium over par, the premium is "lost" over the life of the bond In other words, the capital loss is pro-rated over bonds life to include effect of annual capital loss on the bonds yield. |
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Why is Yield to Maturity is lowest for a Premium Bond |
because it reflects the fact that the bond is being purchased for more than par and it also reflects the annual loss of the bond premium as a reduction of the investment return. |
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When is a bond issuer likely to call in a callable bond? Why would the issuer want to call in these bonds at this time? |
Issuer would call in the bonds typically when interest rates fall. This is because they can then issue new bonds at a lower interest rate. |
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Why is it never welcomed, from an investor standpoint, when a investor calls in a bond. |
Because while the investor might get a premium, the issuer then has to reinvest his money at a lower interest rate. |
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How many years of "Call Protection" does an investor have with a bond. |
10 years. Investors are reluctant to buy bonds with shorter lengths of call protection. |
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In regards to Callable Bonds, what is the different between when a conventional bond is called and a Zero-Coupon Bond is called? |
Conventional Bonds are called at par + a call premium Zero-Coupon Bonds are called at their accredited value (purchase price + compound growth-to-date) + a Call Premium |
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What is a Put Provision |
A provision that allows the bondholder to resell a bond back to issuer at a price (usually at par) on certain stipulated dates prior to maturity |
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Who is a Put Provision beneficial to and why? |
It's beneficial to the bondholder. Protects against changes in interest rates or credit quality of the bond issuer. It also adds a floor price for the bond. Both of which mitigate risk. |
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Why would an issuer place a put-provision on a bond. |
To make it more marketable and keep from having to increase the coupon-rate. |
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When would a Put-Provision likely be called? |
in the event if interest-rates rise or a bond creditor rating decreases |
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Relationship between an increase in Interest Rates in the market and the YTM of outstanding bonds. What happens to YTC? |
If interest rates increase the YTM must increase to keep the bond competitive. At the same time the YTC must also increase, due to drop in the bond's price. |
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For a Discount Bond, the YTC is ________ than the YTM? Why is this? |
Greater since discount is earned faster |
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For a Premium Bond the YTC is ______ than the YTM Why is this? |
Less Since Premium is lost faster. |
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According to Moody's and Fitch what is the credit rating of U.S Treasury Bonds?? |
AAA |
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According to Moody's short term ratings for commercial paper? What do they stand for? |
P1, P2, P3, and NP P = Prime Paper NP = Not Prime |
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What are Moody's short term ratings for Municipal Notes? What do they stand for? |
MIG 1 MIG 2 MIG 3 SG MIG = Moody's investment Grade SG = Speculative Grade |
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What are Standard and Poors short term ratings for Commercial Paper |
A Rated: A-1 A-2 A-3 B Rated: B C Rated: c |
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When it comes to short term securities such as commercial paper, institutional investors and mutual funds usually limit purchases too what grades? (Standard and Poors and Moody's) |
Moody's: P1 and P2 Standard and Poors: A1 and A2 |
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Another word for "Market Risk" is? |
Interest Rate Risk |
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Interest Rate risk only applies to what type of securities? |
Fixed-Income Securities. |
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Describe a variable-rate bond |
The interest-rate on the bond is periodically reset to the market. If the market rate goes up so will the bond rate. Because interest rates move with market the price stays close to par do not have interest rate risk |
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Define Purchasing Power Risk |
Also called inflation risk. The risk that inflation will lower the value of the bond with both interest payments and principal repayment. |
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What happens when inflation rises quickly? |
Interest rates go up. |
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What protects against Purchasing Power Risk? |
TIPS (Treasury Inflation Protection Securities) |
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What is Marketability Risk? |
The risk that a security will be difficult to sell. |
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Where is Marketability Risk basically non-existent? |
Treasury bond market, because of its size and liquidity. |
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What is Liquidity Risk? |
risk that the security can only be sold by incurring large transaction costs. |
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Which securities tend to be affected most by Liquidity Risk? |
Bonds with longer maturities and lower qualities. |
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What is Legislative Risk? |
The risk that new laws will reduce the value of a security. |
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What is Call Risk? |
the risk that a bond may be redeemed prior till maturity, forcing reinvestment of the proceeds at a lower interest rate. |
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What happens to Call-Risk as interest rates go down? |
It increases as interest rates go down. They can call in bonds at high rate and refund them back out at lower rate. |
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Which types of bonds are the most susceptible to call-risk? |
bonds with high coupon rates and low call premiums. (less likely to be called when the coupon rates are low and their are high call premiums.) |