Finance - Bsns108 - Bonds

Front 1

What does a bond involve?

Back 1

Paying you regular payments as well as a lump sum (principal) at the end of the loan period

Front 2

Coupon

Back 2

Stated interest payment made on a bond - regular payment each time interval

Front 3

How do you calculate a coupon?

Back 3

Coupon rate x Face Value

Front 4

Face Value

Back 4

Principal amount of a bond that is repaid at the end of the term

Front 5

What is Face Value also known as?

Back 5

Par Value

Front 6

Coupon Rate

Back 6

The annual coupon divided by the face value of the bond

Front 7

Maturity

Back 7

Date on which the principal amount of a bond is paid

Front 8

YTM

Back 8

Yield to Maturity - The interest rate on a bond required in the market

Front 9

As YTM increases, Price _____.

Back 9

Decreases

Front 10

Discount Bond

Back 10

When the YTM increases and the price decreases below Face Value

Front 11

As YTM decreases, Price _______.

Back 11

Increases

Front 12

Premium Bond

Back 12

When the YTM decreases, the price of the bond increases above Face Value

Front 13

If the YTM is less than the coupon rate, Bond price is _______

Back 13

Higher

Front 14

If the YTM is greater than the coupon rate, Bond price is ______

Back 14

Lower

Front 15

Bond price is higher when the YTM is _______ than the coupon rate

Back 15

Less

Front 16

Bond Price is lower when the YTM is _______ than the coupon rate

Back 16

Greater

Front 17

What is a bond called when the YTM = Coupon rate?

Back 17

Par bond - trading at par

Front 18

When YTM = Coupon rate what is the relationship between bond price and face value?

Back 18

Bond price = face value

Front 19

Par Bond

Back 19

When YTM = Coupon rate and thus Bond price = face value

Front 20

Interest Rate Risk

Back 20

The risk that arises for bond owners from fluctuating interest rates

Front 21

When interest rate is high, bond price is _______

Back 21

Low

Front 22

When interest rate is low, bond price is ______

Back 22

High

Front 23

What does the interest rate risk of a bond depend on?

Back 23

- Time to maturity
- Coupon rate

Front 24

The longer the time to maturity, the ______ the interest rate risk

Back 24

Greater

Front 25

The _______ the time to maturity, the greater the interest rate risk

Back 25

Longer

Front 26

The lower the coupon rate, the _____ the interest rate risk

Back 26

Greater

Front 27

The ______ the coupon rate, the greater the interest rate risk

Back 27

Lower

Front 28

Zero Coupon Bond

Back 28

A bond that makes no coupon payments and thus is initially priced at a deep discount
--> no 'g' in the equation

Front 29

Bond indenture

Back 29

Contract between company and bond holders

Front 30

What does a bond indenture include?

Back 30

- basic terms of bond
- Total amount and value of bonds issued
- Description of property used as a security
- Call provisions
- Details of protective covenants

Front 31

Nominal rate

Back 31

Interest rates of rates of return that have NOT been adjusted for inflation
- includes the effect of inflation within the measure

Nominal rate = real rate + inflation

Front 32

Real Rate

Back 32

Interest rates or rates of return that HAVE been adjusted for inflation
- the rate after inflation has been removed

Front 33

Term structure

Back 33

The relationship between nominal interest rates on default-free, pure discount securities and time to maturity
--> shows how interest rates on bonds change with maturity
--> Relationship between maturity and yields, all else equal

Front 34

Which factors affect YTM?

Back 34

- Default risk premium
- Liquidity premium

Front 35

Default risk premium

Back 35

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default

Front 36

Low bond ratings require _____ yields

Back 36

Higher

Front 37

Tax free bonds have _______ yields

Back 37

Lower

Front 38

_____ Bond ratings require higher yields

Back 38

Low

Front 39

_______ bonds have lower yields

Back 39

Tax-free

Front 40

Liquidity Premium

Back 40

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity (saleability)

Front 41

Less liquid bonds have ______ yields

Back 41

Higher

Front 42

______ liquid bonds have higher yields

Back 42

Less

Front 43

Bonds that have more frequent trading have _______ required yields

Back 43

Lower

Front 44

Bonds that have _____ frequent trading have lower required yields

Back 44

More

Front 45

Yield Curve

Back 45

A plot of the yields on a particular security relative to maturity
--> graph of the term structure

Front 46

Normal yield curve

Back 46

Upward sloping
--> Long-term yields/rates are higher than short-term yields/rates

Front 47

Inverted yield curve

Back 47

Downward sloping
--> Short-term yields/rates are higher than long-term yields/rates

Front 48

Long-term yields are higher than short term yields

Back 48

Normal

Front 49

Short-term yields are higher than long-term yields

Back 49

Inverted

Front 50

Debt or Equity: Ownership interest

Back 50

Equity

Front 51

Debt or Equity: Not ownership interest

Back 51

Debt

Front 52

Debt or Equity: Creditors do not have voting rights

Back 52

Debt

Front 53

Debt or Equity: Shareholders vote in board of directors

Back 53

Equity

Front 54

Debt or Equity: Legalities if interest/principal payments missed

Back 54

Debt

Front 55

Debt or Equity: Dividends not a liability of company until declared

Back 55

Equity

Front 56

Index Bond

Back 56

The principal is adjusted according to the rate of inflation and the coupon interest is then paid on the new principal

Front 57

Floating Rate Bond

Back 57

Coupon Payments are adjustable

Front 58

Subordinated Bonds

Back 58

In the event of liquidation, these bonds rank behind all other debtors

Front 59

Convertible Bond

Back 59

Can be swapped for shares