If the coupon rate is expressed annually but payments are more frequent, the calculation of bond value requires;
Divide annual coupon by no of compounding periods to give C, Divide annual rate by no of compounding periods to give r, Multiply remaining years by no of compounding periods to give T
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How does YTM and coupon rate relationship relate to the bond value
Coupon rate = coupon payment / face value, YTM = Coupon payment / Bond value YTM< Coupon rate, Bond trades at premium YTM> Coupon rate, Bond trades at discount YTM = Coupon rate, Bond trades at par
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What is price risk
Change in price due to change in interest rates
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What is the price risk of LT bonds compared to ST bonds
LT higher than ST
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What is the price risk of high coupon rate bonds compared to low coupon rate bonds
Low rate higher than high rate
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What is Reinvestment Rate Risk
Uncertainty concerning rates at which cash flows can be invested
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What is the Reinvestment Rate Risk of LT bonds compared to ST bonds
ST more than LT
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What is the Reinvestment Rate Risk of high coupon rate bonds compared to low coupon rate bonds
High rate more risk than low rate
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What are the 2 ways at calculating YTM
If we know price, coupon rate, maturity date, and face value, find r by trial and error If coupon is semi annual, r = ½ YTM OR YTM = current yield + capital gains yield YTM =
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What are the characteristics of Equity
o Ownership interest, voting rights and dividends are paid
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What are the characteristics of Debt
o No ownership interest, interest is considered cost of doing business and is taxed o Creditors have legal recourse if interest or principal payments are missed
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What are Treasury Securities, and how are they differentiated
o Federal Government Debt. o T bills < 1 year, T notes 110 years
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What are Zero Coupon Bonds, what are they also known as, and how is the PV calculated
Principal paid at maturity, know as pure discount bonds. PV=
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Which bonds are taxed, and how is after tax yield calculated
o Corporate Bonds are taxed, After tax yield = r(1-T)
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What is the Fisher Effect
o 1+R = (1+r)(1+h) o approx. R=r+h, R where r-real interest, R-nominal interest rate, h- expected inflation rate
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What is a Term Structure
o Relationship between time to maturity and yield, ceteris paribus
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What is a yield curve and what does it show
Graphical representation of term structure Normal, upward sloping, LT yields > ST yields Inverted, downward sloping, LT yields < ST yields
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What are the factors affecting required return
Default risk premium – Bond ratings Taxability premium – Municipal vs taxable Liquidity premium – Bonds with frequent trading have lower required returns Anything else that effects risk to bondholders
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Other cards in this set
Card 2
Front
If the coupon rate is expressed annually but payments are more frequent, the calculation of bond value requires;
Back
Divide annual coupon by no of compounding periods to give C, Divide annual rate by no of compounding periods to give r, Multiply remaining years by no of compounding periods to give T
Card 3
Front
How does YTM and coupon rate relationship relate to the bond value
Back
Card 4
Front
What is price risk
Back
Card 5
Front
What is the price risk of LT bonds compared to ST bonds
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