Boundless Study Slides

Report
Boundless Lecture Slides
Available on the Boundless Teaching Platform
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Teaching
Platform
Boundless empowers educators to engage their students
with affordable, customizable textbooks and intuitive
teaching tools. The free Boundless Teaching Platform
gives educators the ability to customize textbooks in
more than 20 subjects that align to hundreds of popular
titles. Get started by using high quality Boundless books,
or make switching to our platform easier by building from
Boundless content pre-organized to match the assigned
textbook. This platform gives educators the tools they
need to assign readings and assessments, monitor
student activity, and lead their classes with pre-made
teaching resources.
Using Boundless Presentations
The Appendix
The appendix is for you to use to add depth and
breadth to your lectures. You can simply drag and
drop slides from the appendix into the main
presentation to make for a richer lecture
experience.
Get started now at:
http://boundless.com/teaching-platform
Free to edit, share, and copy
Feel free to edit, share, and make as many copies
of the Boundless presentations as you like. We
encourage you to take these presentations and
make them your own.
If you have any questions or problems please email:
educators@boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
About Boundless
Boundless is an innovative technology company making education more affordable and
accessible for students everywhere. The company creates the world’s best open educational
content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless
integrates learning technology into all its premium books to help students study more efficiently
at a fraction of the cost of traditional textbooks. The company also empowers educators to
engage their students more effectively through customizable books and intuitive teaching tools
as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free
and premium content each month across the company’s wide distribution platforms, including its
website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with
Boundless, visit boundless.com.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
The Basics of Interest Rates
Additional Topics in Interest Rates
Key Characteristics of Bonds
Understanding Bonds
Advantages and Disadvantages of Bonds
Boundless.com/finance
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
(continued)
Types of Bonds
Bond Markets
Valuing Bonds
Bond Risk
Boundless.com/finance
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation > The Basics of Interest Rates
The Basics of Interest Rates
• Understanding the Cost of Money
• Interest Rate Levels
• Drivers of Market Interest Rates
• The Term Structure
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > The Basics of Interest Rates
Understanding the Cost of Money
• The concept of the cost of money has its basis, as does the subject of finance in
general, in the time value of money.
• The time value of money refers to the fact that a dollar in hand today is worth
more than a dollar promised at some future time.
• The trade-off between money now (holding money) and money later (investing)
depends on, among other things, the rate of interest you can earn by
investing.Therefore, interest is the cost of money.
Cost Of Money
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/the-basics-of-interest-rates-61/understanding-the-cost-ofmoney-279-3885
Bond Valuation > The Basics of Interest Rates
Interest Rate Levels
• In the U.S., the Federal Reserve (often referred to as 'The Fed') implements
monetary policies largely by targeting the federal funds rate.
• Expansionary monetary policy is traditionally used to try to combat unemployment
in a recession by lowering interest rates in the hope that easy credit will entice
businesses into expanding.
• Contractionary monetary policy is intended to slow inflation in hopes of avoiding
the resulting distortions and deterioration of asset values.
• Crowding out is a phenomenon occurring when expansionary fiscal policy causes
interest rates to rise, thereby reducing investment spending.
Federal fund rates
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/the-basics-of-interest-rates-61/interest-rate-levels-280-3886
Bond Valuation > The Basics of Interest Rates
Drivers of Market Interest Rates
• A market interest rate is the rate at which interest is paid by a borrower for the
use of money that they borrow from a lender in the market.
• Economists generally agree that the interest rates yielded by any investment take
into account: the risk-free cost of capital, inflationary expectations, the level of risk
in the investment, and the costs of the transaction.
• A basic interest rate pricing model for an asset is presented by the following
formula: in = ir + pe + rp + lp.
Worldwide Inflation Rates 2009
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/the-basics-of-interest-rates-61/drivers-of-market-interestrates-281-1863
Bond Valuation > The Basics of Interest Rates
The Term Structure
• Term structure of interest rates is often referred to as the yield curve.
• The expectation hypothesis of the term structure of interest rates is the
proposition that the long-term rate is determined by the market's expectation for
the short-term rate plus a constant risk premium.
• The liquidity premium theory asserts that long-term interest rates not only reflect
investors' assumptions about future interest rates but also include a premium for
holding long-term bonds.
• In the segmented market hypothesis, financial instruments of different terms are
not substitutable; therefore, supply and demand in the markets for short-term and
Yield curve for USD
long-term instruments is determined largely independently.
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/the-basics-of-interest-rates-61/the-term-structure-282-3884
Bond Valuation > Additional Topics in Interest Rates
Additional Topics in Interest Rates
• The Yield Curve
• Using the Yield Curve to Estimate Interest Rates in the Future
• Macroeconomic Factors Influencing the Interest Rate
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Additional Topics in Interest Rates
The Yield Curve
• In finance the yield curve is a curve showing several yields or interest rates
across different contract lengths for a similar debt contract.
• Based on the shape of the yield curve, we have normal yield curves, steep yield
curves, flat or humped yield curves, and inverted yield curves.
• There are three main economic theories that attempt to explain different term
structures of interest rates, namely the expectation hypothesis, the liquidity
premium theory, and the segmented market hypothesis.
Israel Shekel yield curve
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/additional-topics-in-interest-rates-62/the-yield-curve-2833881
Bond Valuation > Additional Topics in Interest Rates
Using the Yield Curve to Estimate Interest Rates in the Future
• A normal yield curve tells us that investors believe the Federal Reserve is going to
raise interest rates in the future.
• A flat yield tells us that investors believe the Federal Reserve is going to be
cutting interest rates.
• An inverted yield curve tells us that investors believe the Federal Reserve is going
to dramatically cut interest rates.
• A flat curve expects unchanged interest rates in the future, sending signals of
uncertainty in the economy.
• An inverted yield curve occurs when long-term yields fall below short-term yields,
indicating a fall in interest rates in the future.
Normal Yield Curve
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/additional-topics-in-interest-rates-62/using-the-yield-curve-toestimate-interest-rates-in-the-future-284-3883
Bond Valuation > Additional Topics in Interest Rates
Macroeconomic Factors Influencing the Interest Rate
• In economics, the Taylor rule is a monetary-policy rule that stipulates how much
the Central Bank should change the nominal interest rate in response to changes
in inflation, output, or other economic conditions.
• If the inflationary expectation goes up, then so does the market interest rate and
vice versa.
• If output gap is positive, it is called an "inflationary gap," possibly creating
inflation, signaling a increase in interest rates made by the Central Bank; if output
gap is negative, it is called a "recessionary gap," possibly signifying deflation and
a reduction in interest rates.
Interest Rates in Turkey
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/additional-topics-in-interest-rates-62/macroeconomic-factorsinfluencing-the-interest-rate-285-3882
Bond Valuation > Key Characteristics of Bonds
Key Characteristics of Bonds
• Par Value
• Coupon Interest Rate
• Maturity Date
• Call Provisions
• Sinking Funds
• Other Features
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Key Characteristics of Bonds
Par Value
• When a bond trades at a price above the face value, it is said to be selling at a
premium.When a bond sells below face value, it is said to be selling at a discount.
• A bond's price fluctuates throughout its life in response to a number of variables,
including interest rates and time to maturity.
• Pull to par is the effect in which the price of a bond converges to par value as time
passes.At maturity, the price of a debt instrument in good standing should equal
its par (or face value).
Temporary bonds for the state of Kansas issued
in 1922
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/key-characteristics-of-bonds-63/par-value-286-6789
Bond Valuation > Key Characteristics of Bonds
Coupon Interest Rate
• Coupon interest rate is usually fixed throughout the life of the bond.It can also
vary with a money market index.
• Not all bonds have coupons.Zero-coupon bonds are those that pay no coupons
and thus have a coupon rate of 0%.
• Based on different coupon rates, there are fixed rate bonds, floating rate bonds,
and inflation linked bonds.
Mecca Temple 1922 Bond Coupons
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/key-characteristics-of-bonds-63/coupon-interest-rate-2871541
Bond Valuation > Key Characteristics of Bonds
Maturity Date
• As long as all due payments have been made, the issuer has no further
obligations to the bond holders after the maturity date.
• The length of time until the maturity date is often referred to as the term or tenor
or maturity of a bond.
• In the market for United States Treasury securities, there are three categories of
bond maturities: short term, medium term, and long term.
Austrian war bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/key-characteristics-of-bonds-63/maturity-date-288-877
Bond Valuation > Key Characteristics of Bonds
Call Provisions
• A callable bond is a type of bond that allows the issuer of the bond to retain the
privilege of redeeming the bond at some point before the bond reaches its date of
maturity.
• If interest rates in the market have gone down by the time of the call date, the
issuer will be able to refinance its debt at a cheaper level and so will be
incentivized to call the bonds it originally issued.
• Most callable bonds allow the issuer to repay the bond at par.With some bonds,
the issuer has to pay a premium, known as the call premium.
• Price of callable bond = Price of straight bond – Price of call option.Price of a
callable bond is always lower than the price of a straight bond because the call
Redeemed Bonds
View on Boundless.com
option adds value to an issuer.
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/key-characteristics-of-bonds-63/call-provisions-289-8368
Bond Valuation > Key Characteristics of Bonds
Sinking Funds
• Sinking fund provision of the corporate bond indenture requires a certain portion
of the issue to be retired periodically.
• A sinking fund reduces credit risk but presents reinvestment risk to bondholders.
• For the creditors, the fund reduces the risk the organization will default when the
principal is due: it reduces credit risk.However, if the bonds are callable, this
comes at a cost to creditors, because the organization has an option on the
bonds.
Farm bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/key-characteristics-of-bonds-63/sinking-funds-290-6794
Bond Valuation > Key Characteristics of Bonds
Other Features
• The yield is the rate of return received from investing in the bond.It usually refers
either to the current yield, or to the yield to maturity or redemption yield.
• The market price of a tradeable bond will be influenced by the amounts, currency
and timing of the interest payments and capital repayment due, the quality of the
bond, and the available redemption yield of other comparable bonds which can be
traded in the markets.
• Some bonds give the holder the right to force the issuer to repay the bond before
the maturity date on the put dates.These are referred to as retractable or putable
bonds.
San Francisco Pacific Railroad Bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/key-characteristics-of-bonds-63/other-features-291-6795
Bond Valuation > Understanding Bonds
Understanding Bonds
• The Nature of Bonds
• Duration
• Indenture
• Ratings
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Understanding Bonds
The Nature of Bonds
• A bond is an instrument of indebtedness of the bond issuer to the holders.The
issuer owes the holders a debt and, depending on the terms of the bond, is
obliged to pay them interest (the coupon) and/or to repay the principal at a later
date, termed the maturity.
• Bonds provide the borrower with external funds to finance long-term investments,
or, in the case of government bonds, to finance current expenditure.
• Bonds and stocks are both securities, but the major difference between the two is
that (capital) stockholders have an equity stake in the company (i.e. they are
owners), whereas bondholders have a creditor stake in the company (i.e. they are
lenders).
A bond from the Dutch East India Company
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/understanding-bonds-64/the-nature-of-bonds-292-6602
Bond Valuation > Understanding Bonds
Duration
• A good approximation for bond price changes due to yield is the duration, a
measure for interest rate risk.
• The Macaulay duration is the name given to the weighted average time until cash
flows are received and is measured in years.It really makes sense only for an
instrument with fixed cash flows.
• The modified duration is the name given to the price sensitivity and is the
percentage change in price for a unit change in yield.It really makes sense only
for an instrument with fixed cash flows.
• The modified duration is a derivative (rate of change) or price sensitivity and
measures the percentage rate of change of price with respect to yield.The
Macaulay duration
View on Boundless.com
concept of modified duration can be applied to interest-rate sensitive instruments
with non-fixed cash flows.
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/understanding-bonds-64/duration-293-3397
Bond Valuation > Understanding Bonds
Indenture
• Terms of indentures include the interest rate, maturity date, repayment dates,
convertibility, pledge, promises, representations, covenants, and other terms of
the bond offering.
• A bond indenture is held by a trustee.If the company fails to live up to the terms of
the bond indenture, the trustee may bring legal action against the company on
behalf of the bondholders.
• The offering memorandum, also known as a prospectus, is a document that
describes a financial security for potential buyers.
Indenture
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/understanding-bonds-64/indenture-294-4566
Bond Valuation > Understanding Bonds
Ratings
• Ratings play a critical role in determining how much companies and other entities
that issue debt, including sovereign governments, have to pay to access credit
markets; for example, the amount of interest they pay on their issued debt.
• The ratings are assigned by credit rating agencies such as Moody's, Standard &
Poor's, and Fitch.Ratings to have letter designations (such as AAA, B, CC), which
represent the quality of a bond.
• A bond is considered investment-grade (IG) if its credit rating is BBB- or higher by
Standard & Poor's, or Baa3 or higher by Moody's, or BBB(low) or higher by
DBRS.Bond ratings below BBB/Baa are not considered to be investment grade;
such bonds are called junk bonds.
Credit Rating Equivalents
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/understanding-bonds-64/ratings-295-8364
Bond Valuation > Advantages and Disadvantages of Bonds
Advantages and Disadvantages of Bonds
• Advantages of Bonds
• Disadvantages of Bonds
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Advantages and Disadvantages of Bonds
Advantages of Bonds
• Bonds are a debt security under which the issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay them interest (the coupon)
and or repay the principal at a later date, which is termed the maturity.
• The volatility of bonds (especially short and medium dated bonds) is lower than
that of equities (stocks).Thus bonds are generally viewed as safer investments
than stocks.
• Bonds are often liquid – it is often fairly easy for an institution to sell a large
quantity of bonds without affecting the price much.
• Bondholders also enjoy a measure of legal protection: under the law of most
countries, if a company goes bankrupt, its bondholders will often receive some
San Francisco Pacific Railroad Bond
View on Boundless.com
money back (the recovery amount).
• There are also a variety of bonds to fit different needs of investors.
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/advantages-and-disadvantages-of-bonds-65/advantages-ofbonds-296-3887
Bond Valuation > Advantages and Disadvantages of Bonds
Disadvantages of Bonds
• A bond is an instrument of indebtedness of the bond issuer to the holders.It is a
debt security under which the issuer owes the holders a debt and, depending on
the terms of the bond, is obliged to pay them interest and possibly repay the
principal at a later date, which is termed the maturity.
• Fixed rate bonds are subject to interest rate risk, meaning that their market prices
will decrease in value when the generally prevailing interest rates rise.
• Bonds are also subject to various other risks such as call and prepayment risk,
credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility
risk, inflation risk, sovereign risk, and yield curve risk.
• A company's bondholders may lose much or all their money if the company goes
Bond
View on Boundless.com
bankrupt.There is no guarantee of how much money will remain to repay
bondholders.
• Some bonds are callable.This creates reinvestment risk, meaning the investor is
forced to find a new place for his money.As a consequence, the investor might not
be able to find as good a deal, especially because this usually happens when
interest rates are falling.
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/advantages-and-disadvantages-of-bonds-65/disadvantagesof-bonds-297-3888
Bond Valuation > Types of Bonds
Types of Bonds
• Government Bonds
• Zero Coupon Bonds
• Floating-Rate Bonds
• Other Types of Bonds
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Types of Bonds
Government Bonds
• A government bond is a bond issued by a national government, generally
promising to pay a certain amount (the face value) on a certain date, as well as
periodic interest payments.Such bonds are often denominated in the country's
domestic currency.
• In the primary market, Government Bonds are often issued via auctions at Stock
Exchanges.In the secondary market, government bonds are traded at Stock
Exchanges.
• Although, government bonds are usually referred to as risk-free, there are
currency, inflation, and default risks for government bondholders.
Government Bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/types-of-bonds-66/government-bonds-298-1462
Bond Valuation > Types of Bonds
Zero Coupon Bonds
• Zero-coupon bonds may be created from fixed rate bonds by a financial institution
separating ("stripping off") the coupons from the principal.In other words, the
separated coupons and the final principal payment of the bond may be traded
separately.
• Zero coupon bonds have a duration equal to the bond's time to maturity, which
makes them sensitive to any changes in the interest rates.
• Pension funds and insurance companies like to own long maturity zero-coupon
bonds since these bonds' prices are particularly sensitive to changes in the
interest rate and, therefore, offset or immunize the interest rate risk of these firms'
long-term liabilities.
SMAC bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/types-of-bonds-66/zero-coupon-bonds-299-1464
Bond Valuation > Types of Bonds
Floating-Rate Bonds
• FRBs are typically quoted as a spread over the reference rate.At the beginning of
each coupon period, the coupon is calculated by taking the fixing of the reference
rate for that day and adding the spread.A typical coupon would look like three
months USD LIBOR +0.20%.
• FRBs carry little interest rate risk.A FRB has a duration close to zero, and its price
shows very low sensitivity to changes in market rates.As FRBs are almost
immune to interest rate risk.The risk that remains is a credit risk.
• Securities dealers make markets in FRBs.They are traded over the counter,
instead of on a stock exchange.In Europe, most FRBs are liquid, as the biggest
investors are banks.In the United States, FRBs are mostly held to maturity, so the
Municipal bond
View on Boundless.com
markets aren't as liquid.
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/types-of-bonds-66/floating-rate-bonds-300-6890
Bond Valuation > Types of Bonds
Other Types of Bonds
• Bonds directly linked to interest rates include fixed rate bonds, floating rate bonds,
and zero coupon bonds.
• Convertible bonds are bonds that let a bondholder exchange a bond to a number
of shares of the issuer's common stock.Exchangeable bonds allows for exchange
to shares of a corporation other than the issuer.
• Asset-backed securities are bonds whose interest and principal payments are
backed by underlying cash flows from other assets.
• Subordinated bonds are those that have a lower priority than other bonds of the
issuer in case of liquidation.
• Foreign currency bonds are issued by companies, banks, governments, and other
Government Bond
View on Boundless.com
sovereign entities in foreign currencies, as it may appear to be more stable and
predictable than their domestic currency.
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/types-of-bonds-66/other-types-of-bonds-301-8308
Bond Valuation > Bond Markets
Bond Markets
• Purchase Process
• Price Transparency
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Bond Markets
Purchase Process
• Buying a bond involves setting up an account with a broker and requesting that
the broker buy bonds on the buyer's behalf.
• An individual can also purchase bonds by investing in bond funds, which hold
baskets of bonds rather than competing for individual bond sales.
• Most bond funds pay out dividends more frequently than individual bonds.
Bond Brokers
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-markets-67/purchase-process-302-8351
Bond Valuation > Bond Markets
Price Transparency
• A market is transparent if much is known–by many–about what products,
services, or capital assets are available at what price and where.
• In most developed bond markets, such as the United States, Japan, and western
Europe, bonds trade in decentralized, dealer-based, over-the-counter markets.
• Poor transparency contributes to investor differences in bond valuations, as well
as other inefficiencies that may lead to economic losses for market participants
and, ultimately, inhibit business development.
New York Stock Exchange
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-markets-67/price-transparency-303-1005
Bond Valuation > Valuing Bonds
Valuing Bonds
• Present Value of Payments
• Par Value at Maturity
• Yield to Maturity
• Inflation Premium
• Differences Between Real and Nominal Rates
• Time to Maturity
• Calculating the Yield to Maturity using the Bond Price
• Impact of Payment Frequency on Bond Prices
• Making a Bond Refunding Decision
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Valuing Bonds
Present Value of Payments
• The bond price can be summarized as the sum of the present value of the par
value repaid at maturity and the present value of coupon payments.
• The present value of coupon payments is the present value of an annuity of
coupon payments.
• The present value of an annuity is the value of a stream of payments, discounted
by the interest rate to account for the payments being made at various moments
in the future.
Bond Price
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/present-value-of-payments-304-1275
Bond Valuation > Valuing Bonds
Par Value at Maturity
• A bond selling at par has a coupon rate such that the bond is worth an amount
equivalent to its original issue value or its value upon redemption at maturity.
• A typical bond makes coupon payments at fixed intervals during the life of it and a
final repayment of par value at maturity.Together with coupon payments, the par
value at maturity is discounted back to the time of purchase to calculate the bond
price.
• Par value of a bond usually does not change, except for inflation-linked bonds
whose par value is adjusted by inflation rates every predetermined period of time.
Bond Price Formula
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/par-value-at-maturity-305-3876
Bond Valuation > Valuing Bonds
Yield to Maturity
• The Yield to maturity is the internal rate of return earned by an investor who
bought the bond today at the market price, assuming that the bond will be held
until maturity, and that all coupon and principal payments will be made on
schedule.
• Yield to maturity(YTM) = [(Face value/Present value)1/Time period]-1.
• If the YTM is less than the bond's coupon rate, then the market value of the bond
is greater than par value (premium bond).If a bond's coupon rate is less than its
YTM, then the bond is selling at a discount.If a bond's coupon rate is equal to its
YTM, then the bond is selling at par.
• There are some variants of YTM: yield to call, yield to put, yield to worst...
Yield to Maturity
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/yield-to-maturity-306-1274
Bond Valuation > Valuing Bonds
Inflation Premium
• Investors seek this premium to compensate for the erosion in the value of their
capital due to inflation.
• Actual interest rates (without factoring in inflation) are viewed by economists and
investors as being the nominal (stated) interest rate minus the inflation premium.
• Letting r denote the real interest rate, i denote the nominal interest rate, and let π
denote the inflation rate, the Fisher equation is: i = r + π.In the Fisher equation, π
is the inflation premium.
Inflation rate graph
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/inflation-premium-307-7285
Bond Valuation > Valuing Bonds
Differences Between Real and Nominal Rates
• Nominal rate refers to the rate before adjustment for inflation; the real rate is the
nominal rate minus inflation.
• Fisher equation states that the real interest rate is approximately the nominal
interest rate minus the inflation rate: 1 + i = (1+r) (1+E(r)).
• Simple equation between nominal rates and real rates: i = R - r.
Real and nominal
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/differences-between-real-and-nominalrates-308-7284
Bond Valuation > Valuing Bonds
Time to Maturity
• The maturity can be any length of time, but debt securities with a term of less than
one year are generally not designated as bonds.Instead, they are considered
money market instruments.
• In the market for United States Treasury securities, there are three categories of
bond maturities: short-term, medium-term and long-term bonds.
• A bond that takes longer to mature necessarily has a greater duration.The bond
price in this type of a situation, therefore, is more sensitive to changes in interest
rates.
Money market interest rates
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/time-to-maturity-309-903
Bond Valuation > Valuing Bonds
Calculating the Yield to Maturity using the Bond Price
• To achieve a return equal to YTM (i.e., where it is the required return on the
bond), the bond owner must buy the bond at price P0, hold the bond until
maturity, and redeem the bond at par.
• If a bond's coupon rate is less than its YTM, then the bond is selling at a
discount.If a bond's coupon rate is more than its YTM, then the bond is selling at
a premium.If a bond's coupon rate is equal to its YTM, then the bond is selling at
par.
• Formula for yield to maturity: Yield to maturity(YTM) = [(Face value/Bond
price)1/Time period]-1.
USD Yield Curve
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/calculating-the-yield-to-maturity-using-thebond-price-310-1033
Bond Valuation > Valuing Bonds
Impact of Payment Frequency on Bond Prices
• Payment frequency can be annual, semi annual, quarterly, monthly, weekly, daily,
or continuous.
• Bond price is the sum of the present value of face value paid back at maturity and
the present value of an annuity of coupon payments.The present value of face
value received at maturity is the same.However, the present values of annuities of
coupon payments vary among payment frequencies.
• The more frequent a bond makes coupon payments, the higher the bond price,
given equal coupon, par, and face.
Bond price formula
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/impact-of-payment-frequency-on-bondprices-311-4989
Bond Valuation > Valuing Bonds
Making a Bond Refunding Decision
• The issue of new, lower-interest debt allows the company to prematurely refund
the older, higher-interest debt.
• Bond refunding occurs when a) interest rates in the market are sufficiently less
than the coupon rate on the old bond, b) the price of the old bond is less than par.
and c) the sinking fund has accumulated enough money to retire the bond issue.
• The decision of whether to refund a particular debt issue is usually based on a
capital budgeting (present value) analysis.
French Bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/valuing-bonds-68/making-a-bond-refunding-decision-3123877
Bond Valuation > Bond Risk
Bond Risk
• Price Risk
• Reinvestment Risk
• Differences and Commonalities Between Price and Reinvestment
Risks
• Default Risk
• Bond Rating System
• Bankruptcy and Bond Value
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance
Bond Valuation > Bond Risk
Price Risk
• The market price of bonds will decrease in value when the generally prevailing
interest rates rise and vice versa.
• Unless you plan to buy or sell them in the open market, changing interest rates do
not affect the interest payments to the bondholder.
• Price changes in a bond will immediately affect mutual funds that hold these
bonds.If the value of the bonds in their trading portfolio falls, the value of the
portfolio also falls.
Bond price and yield
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-risk-69/price-risk-313-7549
Bond Valuation > Bond Risk
Reinvestment Risk
• Reinvestment risk is more likely when interest rates are declining.
• Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on
the premise that all future coupon payments will be reinvested at the interest rate
in effect when the bond was first purchased.
• Two factors that have a bearing on the degree of reinvestment risk are maturity of
the bond and the coupon interest rate.
Interest rates
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-risk-69/reinvestment-risk-314-280
Bond Valuation > Bond Risk
Differences and Commonalities Between Price and
Reinvestment Risks
• Price risk and reinvestment risk are both the uncertainty associated with the
effects of changes in market interest rates.
• Price risk and changes in interest rates are positively correlated.
• Reinvestment risk and changes in interest rates are inversely correlated.
Pacific Railroad Bond
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-risk-69/differences-and-commonalities-between-priceand-reinvestment-risks-315-7548
Bond Valuation > Bond Risk
Default Risk
• With default risk, the risk is primarily that of the bondholder and includes lost
principal and interest, disruption to cash flows, and increased collection costs.
• To reduce the bondholders' credit risk, the lender may perform a credit check on
the prospective borrower and may require the issuer to take out appropriate
insurance.
• A company's bondholders may lose much or all their money if the company goes
bankrupt.There is no guarantee of how much money will remain to repay
bondholders.
Prices of sovereign credit default swaps
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-risk-69/default-risk-316-7280
Bond Valuation > Bond Risk
Bond Rating System
• In investment, the bond credit rating assesses the credit worthiness of a
corporation's or government debt issues.
• The credit rating is a financial indicator to potential investors of debt securities,
such as bonds.These are assigned by credit rating agencies such as Moody's,
Standard & Poor's, and Fitch Ratings to have letter designations (such as AAA, B,
CC) which represent the quality of a bond.
• Bond ratings below BBB-/Baa are considered not to be investment grade and are
colloquially called junk bonds.
Bond rating
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-risk-69/bond-rating-system-317-1272
Bond Valuation > Bond Risk
Bankruptcy and Bond Value
• When a business is unable to service its debt or pay its creditors, it or its creditors
can file with a federal bankruptcy court for protection under either Chapter 7 or
Chapter 11 of the Bankruptcy code.
• If a company goes bankrupt, its bondholders will often receive some money back
(the recovery amount).
• In a bankruptcy involving reorganization or recapitalization, as opposed to
liquidation, bondholders may end up having the value of their bonds reduced,
often through an exchange for a smaller number of newly-issued bonds.
Bankruptcy Courthouse
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/bond-risk-69/bankruptcy-and-bond-value-318-7281
Appendix
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Key terms
• abscond To flee; to withdraw from.
• annuity A specified income payable at stated intervals for a fixed or a contingent period, often for the recipient's life, in
consideration of a stipulated premium paid either in prior installment payments or in a single payment.For example, a retirement
annuity paid to a public officer following his or her retirement.
• asset-backed securities An asset-backed security is a security that has value and income payments derived from and
collateralized (or "backed") by a specified pool of underlying assets.The pool of assets is typically a group of small and illiquid
assets that are unable to be sold individually.
• bond funds A bond fund or debt fund is a fund that invests in bonds or other debt securities.Bond funds can be contrasted with
stock funds and money funds.
• call premium the additional cost paid by the issuer for the right to buy back the bond at a predtermined price at a certain time in
the future
• call provision the right for the issuer to buy back the bond at a predetermined price at a certain time in future
• callable A callable bond (also called "redeemable bond") is a type of bond (debt security) that allows the issuer of the bond to
retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.
• clean price the price of a bond excluding any interest that has accrued since issue or the most recent coupon payment.
• convertibility Quality of a bond that allows the holder to convert into shares of common stock in the issuing company or cash of
equal value, at an agreed-upon price.
• Convertible bonds A convertible bond is a type of bond that the holder can convert into shares of common stock in the issuing
company or cash of equal value, at an agreed-upon price.
• Convexity As interest rates change, the price does not change linearly, but rather is a convex function of interest
rates.Convexity is a measure of the curvature of how the price of a bond changes as the interest rate changes.Specifically,
duration can be formulated as the first derivative of the price function of the bond with respect to the interest rate in question,
and the convexity as the second derivative.
• corporate bonds A corporate bond is a bond issue by a corporation.It is a bond that a corporation issues to raise money
Free to share, print, make copies and changes. Get yours at www.boundless.com
effectively in order to expand its business.
Bond Valuation
• credit rating agencies A credit rating agency (CRA) is a company that assigns credit ratings to issuers of certain types of debt
obligations, as well as to the debt instruments themselves.
• debentures A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral.
• discount rate The interest rate used to discount future cash flows of a financial instrument; the annual interest rate used to
decrease the amounts of future cash flow to yield their present value.
• discount rate The interest rate used to discount future cash flows of a financial instrument; the annual interest rate used to
decrease the amounts of future cash flow to yield their present value.
• duration A measure of the sensitivity of the price of a financial asset to changes in interest rates, computed for a simple bond
as a weighted average of the maturities of the interest and principal payments associated with it
• duration A measure of the sensitivity of the price of a financial asset to changes in interest rates, computed for a simple bond
as a weighted average of the maturities of the interest and principal payments associated with it
• duration A measure of the sensitivity of the price of a financial asset to changes in interest rates, computed for a simple bond
as a weighted average of the maturities of the interest and principal payments associated with it
• Exchange rate risk The exchange rate risk is a financial risk posed by an exposure to unanticipated changes in the exchange
rate between two currencies.
• floating-rate bond a debt instruments with a variable coupon
• gross domestic product A measure of the economic production of a particular territory in financial capital terms over a specific
time period.
• hedge funds An investment fund that can undertake a wider range of investment and trading activities than other funds, but
which is generally only open to certain types of investors specified by regulators.
• immunize In finance, interest rate immunization is a strategy that ensures that a change in interest rates will not affect the value
of a portfolio.Similarly, immunization can be used to ensure that the value of a pension fund's or a firm's assets will increase or
decrease in exactly the opposite amount of their liabilities, thus leaving the value of the pension fund's surplus or firm's equity
unchanged, regardless of changes in the interest rate.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• indenture a document, written as duplicates separated by indentations, specifying such a contract
• inflation An increase in the general level of prices or in the cost of living.
• inflation-linked bonds Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where
the principal is indexed to inflation.They are thus designed to cut out the inflation risk of an investment.
• inflation-linked bonds Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where
the principal is indexed to inflation.They are thus designed to cut out the inflation risk of an investment.
• inflationary gap An inflationary gap, in economics, is the amount by which the real gross domestic product, or real GDP,
exceeds potential GDP.
• insolvent Unable to pay one's bills as they fall due.
• interest rate The percentage of an amount of money charged for its use per some period of time.It can also be thought of as the
cost of not having money for one period, or the amount paid on an investment per year.
• interest rate risk the potential for loss that arises for bond owners from fluctuating interest rates
• internal rate of return IRR.The rate of return on an investment which causes the net present value of all future cash flows to be
zero.
• LIBOR The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would
be charged if borrowing from other banks.
• LIBOR The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would
be charged if borrowing from other banks.
• liquidated In law, liquidation is the process by which a company (or part of a company) is brought to an end and the assets and
property of the company redistributed.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• liquidation The selling of the assets of a business as part of the process of dissolving the business.
• liquidity Availability of cash over short term: ability to service short-term debt.
• Liquidity premium Liquidity premium is a term used to explain a difference between two types of financial securities (e.g.
stocks), that have all the same qualities except liquidity.
• market liquidity In business, economics or investment, market liquidity is an asset's ability to be sold without causing a
significant movement in the price and with minimum loss of value.
• monetary policy The process by which the monetary authority of a country controls the supply of money, often targeting a rate
of interest for the purpose of promoting economic growth and stability.
• money market A market for trading short-term debt instruments, such as treasury bills, commercial paper, bankers'
acceptances, and certificates of deposit
• municipal bonds A municipal bond is a bond issued by an American city or other local government, or their agencies.
• mutual funds A type of professionally-managed collective investment vehicle that pools money from many investors to
purchase securities.While there is no legal definition, the term is most commonly applied only to those collective investment
vehicles that are regulated, available to the general public and open-ended in nature.
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• par Equal value; equality of nominal and actual value; the value expressed on the face or in the words of a certificate of value,
as a bond or other commercial paper.
• par value the stated value or amount of a bill or a note
• Pension funds A pension fund is any plan, fund, or scheme which provides retirement income.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Pension funds Any plan, fund, or scheme which provides retirement income.
• Preferred Stock Stock with a dividend, usually fixed, that is paid out of profits before any dividend can be paid on common
stock.It also has priority to common stock in liquidation.
• premium the price above par value at which a security is sold
• premium bond a debt instrument bought at a price above par value
• public debt offerings A public debt offering is the offering of debt securities of a government, a company or a similar corporation
to the public.
• purchasing power Purchasing power (sometimes retroactively called adjusted for inflation) is the amount of goods or services
that can be purchased with a unit of currency.
• purchasing power Purchasing power (sometimes retroactively called adjusted for inflation) is the amount of goods or services
that can be purchased with a unit of currency.
• purchasing power parity a theory of long-term equilibrium exchange rates based on relative price levels of two countries
• puttable Puttable bond (put bond, putable, or retractable bond) is a bond with an embedded put option.The holder of the
puttable bond has the right, but not the obligation, to demand early repayment of the principal.
• quote To name the current price, notably of a financial security.
• Real interest rate The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation.It can be
described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest
rate minus the inflation rate.
• recapitalization A restructuring of a company's mixture of equity and debt.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Recessionary gap An inflationary gap, in economics, is the amount by which the real Gross domestic product, or real GDP, is
less than the potential GDP.
• Reinvestment risk The reinvestment risk is the possibility that the investor might be forced to find a new place for his money.As
a consequence, the investor might not be able to find as good a deal, especially because this usually happens when interest
rates are falling.
• resale market The resale market, also called "secondary market" or "aftermarket," is the financial market in which previously
issued financial instruments, such as stock, bonds, options, and futures, are bought and sold.
• risk premium A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the
known return on a risk-free asset, or the expected return on a less risky asset, in order to induce an individual to hold the risky
asset rather than the risk-free asset.
• sinking fund A sinking fund is a fund established by a government agency or business for the purpose of reducing debt by
repaying or purchasing outstanding loans and securities held against the entity.It helps keep the borrower liquid so it can repay
the bondholder.
• straight bond A straight bond is a bond with no embedded options (call or put options).
• systematic risks In finance and economics, systematic risk (sometimes called aggregate risk, market risk, or undiversifiable
risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource
holdings, or aggregate income.
• term structure of interest rates the relationship between the interest on a debt contract and the maturity of the contract
• time value of money The value of money, figuring in a given amount of interest, earned over a given amount of time.
• tranches One of a number of related securities offered as part of the same transaction.
• transparency (figuratively) openness, degree of accessibility to view
• treasury bill Treasury bills (or T-Bills) mature in one year or less.They do not pay interest prior to maturity; instead they are sold
at a discount of the par value to create a positive yield to maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• treasury bill A United States Treasury security is a government debt issued by the United States Department of the Treasury
through the Bureau of the Public Debt.Treasury securities are the debt financing instruments of the United States federal
government.They are often referred to simply as treasuries.There are four types of marketable treasury securities: Treasury
bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS), in which Treasury bills have the
shortest maturity of one year or less.
• Treasury bond Treasury bonds (T-Bonds, or the long bond) have the longest maturity of government securities, from 20 to 30
years.They have a coupon payment every six months, and are commonly issued with maturity of 30 years
• Treasury bond A United States Treasury security is a government debt issued by the United States Department of the Treasury
through the Bureau of the Public Debt.Treasury securities are the debt financing instruments of the United States federal
government, and they are often referred to simply as Treasuries.There are four types of marketable treasury securities:
Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS), in which Treasury bonds
have the longest maturity, from 20 years to 30 years.
• Treasury bonds A United States Treasury bond is a government debt issued by the United States Department of the Treasury
through the Bureau of the Public Debt, with a maturity of 20 years to 30 years.
• yield curve the graph of the relationship between the interest on a debt contract and the maturity of the contract
• Yield to maturity The Yield to maturity (YTM) or redemption yield of a bond or other fixed-interest security, such as gilts, is the
internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming
that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule.
• Yield to maturity The yield to maturity (YTM) of a bond or other fixed-interest security, such as gilts, is the internal rate of return
(IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be
held until maturity and that all coupon and principal payments will be made on schedule.
• Yield to maturity The internal rate of return on a bond held to maturity, assuming scheduled payment of principal and interest.
• Zero coupon bonds A zero-coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower
than its face value, with the face value repaid at the time of maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Akhtala bond
French Bond for the Akhtala mines issued in 1887, depicting the fortress and the monastery
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Akhtala bond." CC BY-SA http://en.wikipedia.org/wiki/File:Akhtala_bond.jpg View on Boundless.com
Bond Valuation
100 pounds sterling bond
100 pounds sterling bond issued as part of loan for construction of the Chinese Section of the Kowloon-Canton Railway
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "KCRC Chinese Bond." CC BY-SA http://commons.wikimedia.org/wiki/File:KCRC_Chinese_Bond.JPG View on Boundless.com
Bond Valuation
Government Bond
The short-term bond of Kolchak government in 1919 with a face value of 500 rubles.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Russia-Kolchak-1919-Bonds-500-Obverse." CC BY-SA http://commons.wikimedia.org/wiki/File:Russia-Kolchak-1919-Bonds-500-Obverse.png View on
Boundless.com
Bond Valuation
Bond Price
Bond price is the present value of coupon payments and face value paid at maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Bond pricing." GNU FDL http://en.wikipedia.org/wiki/Bond_pricing View on Boundless.com
Bond Valuation
Eurozone Government Bonds Yield
Development of yield to maturity of bonds of 2019 maturity of a number of Eurozone governments.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Eurozone government bonds yield." GNU FDL http://commons.wikimedia.org/wiki/File%253AEurozone_government_bonds_yield.png View on
Boundless.com
Bond Valuation
German bank interest rates
Germany experienced deposit interest rates from 14% in 1969 down to almost 2% in 2003
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Interest rate." GNU FDL http://en.wikipedia.org/wiki/Interest_rate View on Boundless.com
Bond Valuation
Interest rate
Interest rates in the future can be estimated based on the shape of yield curves.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "Interest Rates | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/68751915@N05/6870875029/lightbox/ View on Boundless.com
Bond Valuation
Yield to Maturity
Development of yield to maturity of bonds of 2019 maturity of a number of Eurozone governments.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Eurozone government bonds yield." CC BY-SA http://commons.wikimedia.org/wiki/File:Eurozone_government_bonds_yield.png View on
Boundless.com
Bond Valuation
Flat Yield Curve
A flat yield tells us that investors believe the Federal Reserve is going to cut interest rates.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curvesspreads.html View on Boundless.com
Bond Valuation
Annuity formula
The formula to calculate PV of annuities.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Annuity (finance theory)." GNU FDL http://en.wikipedia.org/wiki/Annuity_(finance_theory) View on Boundless.com
Bond Valuation
Bond rating
Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds."
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Bond rating." GNU FDL http://en.wikipedia.org/wiki/Bond_rating View on Boundless.com
Bond Valuation
Interest Rates in Turkey
Overnight rates in Turkey are estimated to fall in 2013, indicating a loosened monetary policy.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Interest rates in Turkey." CC BY-SA http://commons.wikimedia.org/wiki/File:Interest_rates_in_Turkey.svg View on Boundless.com
Bond Valuation
Credit Rating Equivalents
Credit ratings are used to report on the credit worthiness of a bond issuing company or government
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Bond rating." GNU FDL http://en.wikipedia.org/wiki/Bond_rating View on Boundless.com
Bond Valuation
Mecca Temple 1922 Bond Coupons
A coupon payment on a bond is a periodic interest payment that the bond holder receives during the time between when the bond is issued and when it
matures.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Mecca Temple Coupons." CC BY-SA http://en.wikipedia.org/wiki/File:Mecca_Temple_Coupons.jpg View on Boundless.com
Bond Valuation
Redeemed Bonds
This Bond is one of the 400 issued to the Central Pacific Rail Road Company of California and 200 to the Western Pacific Rail Road Company in 1865
under the Act of the California Legislature passed on April 22, 1863.Coupon #1 was redeemed and cancelled on November 2, 1865, and coupon #35 on
November 2, 1882, at which time the principal of $1,000.00 in gold coin was also paid from the Treasury of the City and County of San Francisco and the
Bond was cancelled.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Pacific RR Bond SF 1865." CC BY-SA http://commons.wikimedia.org/wiki/File%253APacific_RR_Bond_SF_1865.jpeg View on Boundless.com
Bond Valuation
SMAC bond
Bond on VMOK with the signature on Boris Saraf.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "SMAC bond Sarafov." CC BY-SA http://commons.wikimedia.org/wiki/File:SMAC_bond_Sarafov.JPG View on Boundless.com
Bond Valuation
Inverted Yield Curve
An inverted yield curve tells us that investors believe the Federal Reserve is going to dramatically cut interest rates.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curvesspreads.html View on Boundless.com
Bond Valuation
Normal Yield Curve
A normal yield curve tells us that investors believe the Federal Reserve is going to raise interest rates in the future.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curvesspreads.html View on Boundless.com
Bond Valuation
Israel Shekel yield curve
This graph is an example of a yield curve on Israeli Non-Linked Fixed Rate government bonds.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Yield curve israel shekel govt March 2008." CC BY-SA http://commons.wikimedia.org/wiki/File:Yield_curve_israel_shekel_govt_March_2008.gif View
on Boundless.com
Bond Valuation
Federal fund rates
The effective federal funds rate in the U.S. charted over more than half a century.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Interest rate." GNU FDL http://en.wikipedia.org/wiki/Interest_rate View on Boundless.com
Bond Valuation
Worldwide Inflation Rates 2009
World map showing inflation rate by country.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Inflation rate world." GNU FDL http://commons.wikimedia.org/wiki/File%253AInflation_rate_world.PNG View on Boundless.com
Bond Valuation
Annuity
The formula for calculating for the present value of annuity
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Annuity (finance theory)." GNU FDL http://en.wikipedia.org/wiki/Annuity_(finance_theory) View on Boundless.com
Bond Valuation
French Bond
French Bond for the Akhtala mines issued in 1887.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Akhtala bond." CC BY-SA http://commons.wikimedia.org/wiki/File:Akhtala_bond.jpg View on Boundless.com
Bond Valuation
A bond from the Dutch East India Company
A bond is an instrument of indebtedness of the bond issuer to the holders.It is a debt security, under which the issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Vereinigte Ostindische Compagnie bond." CC BY-SA http://en.wikipedia.org/wiki/File:Vereinigte_Ostindische_Compagnie_bond.jpg View on
Boundless.com
Bond Valuation
Inflation rate graph
Inflation rate in the Confederacy during the American Civil War.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Confederate inflation." CC BY-SA http://commons.wikimedia.org/wiki/File:Confederate_inflation.JPG View on Boundless.com
Bond Valuation
San Francisco Pacific Railroad Bond
A bond is an instrument of indebtedness of the bond issuer to the holders.It is a debt security under which the issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay them interest (the coupon).In addition, the issuer might have to repay the principal at a later date,
which is termed the maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "South Carolina consolidation bond." CC BY-SA http://en.wikipedia.org/wiki/File:South_Carolina_consolidation_bond.jpg View on Boundless.com
Bond Valuation
Municipal bond
Municipal bond issued in 1929 by city of Kraków (Poland).
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Obligacja1929Krakow10." CC BY-SA http://en.wikipedia.org/wiki/File:Obligacja1929Krakow10.jpg View on Boundless.com
Bond Valuation
A bond from the Dutch East India Company
A bond is a financial security that represents a promise by a company or government to repay a certain amount, with interest, to the bondholder.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Vereinigte Ostindische Compagnie bond." CC BY-SA http://en.wikipedia.org/wiki/File:Vereinigte_Ostindische_Compagnie_bond.jpg View on
Boundless.com
Bond Valuation
Yield curve for USD
The US dollar yield curve as of February 9, 2005.The curve has a typical upward sloping shape.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Term structure." CC BY http://en.wikipedia.org/wiki/Term_structure View on Boundless.com
Bond Valuation
Modified duration
The modified duration is the name given to the price sensitivity and is the percentage change in price for a unit change in yield.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Duration (finance)." GNU FDL http://en.wikipedia.org/wiki/Duration_(finance) View on Boundless.com
Bond Valuation
Bond
A bond is a debt owned by the enterprise to the bondholder.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "South Carolina consolidation bond." CC BY-SA http://en.wikipedia.org/wiki/File:South_Carolina_consolidation_bond.jpg View on Boundless.com
Bond Valuation
Bond Brokers
Bonds can be purchased through brokerages, such Fidelity Investments.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Fidelity-Inv-Boston." CC BY-SA http://commons.wikimedia.org/wiki/File:Fidelity-Inv-Boston.JPG View on Boundless.com
Bond Valuation
Temporary bonds for the state of Kansas issued in 1922
Par values of these bonds were $50, $100, $10000, and $3000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Bond (finance)." GNU FDL http://en.wikipedia.org/wiki/Bond_(finance) View on Boundless.com
Bond Valuation
San Francisco Pacific Railroad Bond
$1,000 (30 year, 7%) "Pacific Railroad Bond" (#93 of 200) issued by the City and County of San Francisco under "An Act to Authorize the Board of
Supervisors of the City and County of San Francisco to take and subscribe One Million Dollars to the Capital Stock of the Western Pacific Rail Road
Company and the Central Pacific Rail Road Company of California and to provide for the payment of the same and other matters relating thereto"
approved on April 22, 1863, as amended by section Five of the "Compromise Act" approved on April 4, 1864, to fund the construction of the Western
Pacific Railroad between San Francisco Bay (at Alameda) and the CPRR of Cal. at Sacramento, dated May 1, 1865.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "San Francisco Pacific Railroad Bond WPRR 1865." CC BY-SA
http://en.wikipedia.org/wiki/File:San_Francisco_Pacific_Railroad_Bond_WPRR_1865.jpg View on Boundless.com
Bond Valuation
Real and nominal
The relationship between real and nominal interest rates is captured by the formula.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Nominal interest rate." GNU FDL http://en.wikipedia.org/wiki/Nominal_interest_rate View on Boundless.com
Bond Valuation
Bond Price Formula
Bond price is the present value of coupon payments and the par value at maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Bond pricing." GNU FDL http://en.wikipedia.org/wiki/Bond_pricing View on Boundless.com
Bond Valuation
Bond price formula
Bond price is the present value of all coupon payments and the face value paid at maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Bond pricing." GNU FDL http://en.wikipedia.org/wiki/Bond_pricing View on Boundless.com
Bond Valuation
Austrian war bond
The first Austrian bonds had 5% rates of return and a five-year maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Europeana. "Austrian War Bond, item 1." CC BY
http://www.europeana.eu/portal/record/2020601/8152CB363F4F5FCADA898EAB48D93D74AE9D8B41.html?start=5&query=bond+AND+europeana_rights%253A
Bond Valuation
Cost Of Money
The cost of money is the opportunity cost of holding money in hands instead of investing it.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Interest rate vs money balance | Flickr - Photo Sharing!." CC BY-SA
http://www.flickr.com/photos/rmgimages/4882451326/sizes/m/in/photostream/ View on Boundless.com
Bond Valuation
Money market interest rates
Interest rates of one-month maturity of German banks from 1967 to 2003
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "German bank interest rates from 1967 to 2003 grid." CC BY-SA
http://commons.wikimedia.org/wiki/File:German_bank_interest_rates_from_1967_to_2003_grid.svg View on Boundless.com
Bond Valuation
Prices of sovereign credit default swaps
Credit default swaps are an instrument to protect against default risk. This image shows the monthly prices of sovereign credit default swaps from
January 2010 till September 2011 of Greece, Portugal, Ireland, Hungary, Italy, Spain, Belgium, France, Germany, and the UK (Greece is illustrated by
blue line). Higher credit default swap prices mean that investors perceive a higher risk of default.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/7/78/Sovereign_credit_default_swaps.png View on Boundless.com
Bond Valuation
USD Yield Curve
2005 USD yield curve
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/thumb/1/18/USD_yield_curve_09_02_2005.JPG/800pxUSD_yield_curve_09_02_2005.JPG View on Boundless.com
Bond Valuation
Bond price and yield
Several curves depicting the inverse relationship between bond price and yield (interest rates).
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/e/e5/Durvexity.GIF View on Boundless.com
Bond Valuation
Macaulay duration
The Macaulay duration is the name given to the weighted average time until cash flows are received and is measured in years.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Duration (finance)." GNU FDL http://en.wikipedia.org/wiki/Duration_(finance) View on Boundless.com
Bond Valuation
Indenture
Bond indenture (also trust indenture or deed of trust) is a legal contract issued to lenders.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Indenture 1723." CC BY-SA http://commons.wikimedia.org/wiki/File:Indenture_1723.jpg View on Boundless.com
Bond Valuation
Farm bond
One purpose of a sinking fund is to repurchase outstanding bonds.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Farm bond." CC BY-SA http://commons.wikimedia.org/wiki/File:Farm_bond.jpg View on Boundless.com
Bond Valuation
Government Bond
Bond of National Loan issued by Polish National Government in 1863.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Bond of National Loan issued by Polish National Government 1863." CC BY-SA
http://commons.wikimedia.org/wiki/File:Bond_of_National_Loan_issued_by_Polish_National_Government_1863.png View on Boundless.com
Bond Valuation
Interest rates
Reinvestment risk is more likely when interest rates are declining.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Long term interest rates." CC BY-SA http://commons.wikimedia.org/wiki/File:Long_term_interest_rates.png View on Boundless.com
Bond Valuation
Pacific Railroad Bond
$1,000 (30 year, 7%) "Pacific Railroad Bond" (#93 of 200) issued by the City and County of San Francisco.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "San Francisco Pacific Railroad Bond WPRR 1865." CC BY-SA
http://en.wikipedia.org/wiki/File:San_Francisco_Pacific_Railroad_Bond_WPRR_1865.jpg View on Boundless.com
Bond Valuation
New York Stock Exchange
Most bonds are not sold in centralized marketplaces, such as the New York Stock Exchange, leading to a lack of price transparency.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | New York Stock Exchange | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/proimos/5899896730/sizes/m/in/photostream/ View on
Boundless.com
Bond Valuation
Bankruptcy Courthouse
Old U.S. Post Office and Court House, now used by the U.S. Bankruptcy Court for the Northern District of Florida.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Tallahassee FL Bankruptcy Courthouse01." CC BY-SA http://commons.wikimedia.org/wiki/File:Tallahassee_FL_Bankruptcy_Courthouse01.jpg View
on Boundless.com
Bond Valuation
Which of the following statements about government bonds is
NOT true?
A) Government bonds are referred to as "risk-free" because they are
generally free of credit risk.
B) Government bonds are often issued via auctions at stock exchanges.
C) To minimize inflation risk, many countries issue inflation-indexed
bonds.
D) Government bonds are "risk-free" because they are free of currency
risk.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements about government bonds is
NOT true?
A) Government bonds are referred to as "risk-free" because they are
generally free of credit risk.
B) Government bonds are often issued via auctions at stock exchanges.
C) To minimize inflation risk, many countries issue inflation-indexed
bonds.
D) Government bonds are "risk-free" because they are free of currency
risk.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
When does a bond usually sell at its par value?
A) When the bond matures.
B) When the bond is first issued.
C) When the bond's coupon rate is the same as the bond's yield to
maturity.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
When does a bond usually sell at its par value?
A) When the bond matures.
B) When the bond is first issued.
C) When the bond's coupon rate is the same as the bond's yield to
maturity.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A bond makes only one payment - the payment of the face value
on the maturity date. The bond is sold at a discount. What type of
bond is this?
A) Inflation linked bond.
B) Floating rate note.
C) Zero-coupon bond
D) Stepped-coupon bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A bond makes only one payment - the payment of the face value
on the maturity date. The bond is sold at a discount. What type of
bond is this?
A) Inflation linked bond.
B) Floating rate note.
C) Zero-coupon bond
D) Stepped-coupon bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A US Treasury security matures in 7 years. What type of security
is it?
A) A bill.
B) A note.
C) A money market instrument.
D) A bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A US Treasury security matures in 7 years. What type of security
is it?
A) A bill.
B) A note.
C) A money market instrument.
D) A bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A sinking fund is used by firms to retire some of its outstanding
debt every year. Which of the following is a way that a sinking
fund may operate?
A) The firm may repurchase the bonds in the open market.
B) All of these answers
C) The firm may buy the bonds at a special call price stipulated in the
bond's sinking fund provision.
D) The firm may repurchase the bonds at the current market price or the
call price, whichever is lower.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A sinking fund is used by firms to retire some of its outstanding
debt every year. Which of the following is a way that a sinking
fund may operate?
A) The firm may repurchase the bonds in the open market.
B) All of these answers
C) The firm may buy the bonds at a special call price stipulated in the
bond's sinking fund provision.
D) The firm may repurchase the bonds at the current market price or the
call price, whichever is lower.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A US Treasury security matures in 4 years. What type of treasury
is it?
A) A money market instrument.
B) A note.
C) A bill.
D) A bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A US Treasury security matures in 4 years. What type of treasury
is it?
A) A money market instrument.
B) A note.
C) A bill.
D) A bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
The terms of a bond allows its issuer to redeem the security at
anytime. This type of bond is _____.
A) a Bermudan callable.
B) an American callable.
C) a European callable.
D) an Asian callable.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
The terms of a bond allows its issuer to redeem the security at
anytime. This type of bond is _____.
A) a Bermudan callable.
B) an American callable.
C) a European callable.
D) an Asian callable.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
The terms of a bond allow its issuer to redeem the bond on
December 31st, four years after the bond was issued. The issuer
can only redeem the bond on that date. This type of bond is ____
.
A) an American callable.
B) a Bermudan callable.
C) an Asian callable.
D) a European callable.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
The terms of a bond allow its issuer to redeem the bond on
December 31st, four years after the bond was issued. The issuer
can only redeem the bond on that date. This type of bond is ____
.
A) an American callable.
B) a Bermudan callable.
C) an Asian callable.
D) a European callable.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A bond pays a coupon rate equal to the LIBOR rate plus 0.30%.
The coupon rate is recalculated every three months. What type of
bond is this?
A) An inflation linked bond.
B) A stepped-coupon bond.
C) A zero-coupon bond.
D) A floating rate note.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A bond pays a coupon rate equal to the LIBOR rate plus 0.30%.
The coupon rate is recalculated every three months. What type of
bond is this?
A) An inflation linked bond.
B) A stepped-coupon bond.
C) A zero-coupon bond.
D) A floating rate note.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A company issues a bond with a coupon rate of 5%. Since the
bond was issued, market interest rates have decreased. What
effect will this decrease have on the bond's market price and its
current yield?
A) The bond will trade above par and its current yield will increase.
B) The bond will trade below par and its current yield will decrease.
C) The bond will trade below par and its current yield will increase.
D) The bond will trade above par and its current yield will decrease.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A company issues a bond with a coupon rate of 5%. Since the
bond was issued, market interest rates have decreased. What
effect will this decrease have on the bond's market price and its
current yield?
A) The bond will trade above par and its current yield will increase.
B) The bond will trade below par and its current yield will decrease.
C) The bond will trade below par and its current yield will increase.
D) The bond will trade above par and its current yield will decrease.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following is NOT a type of bond?
A) Treasuries
B) Corporate Bonds
C) Certificate of deposits (CDs)
D) Municipal Bonds
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following is NOT a type of bond?
A) Treasuries
B) Corporate Bonds
C) Certificate of deposits (CDs)
D) Municipal Bonds
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements regarding the relationship
between economic factors and the nominal inflation rate is true?
A) If the inflationary expectation goes up, the market interest rate
decreases.
B) For every 1% increase in inflation, the nominal interest rate should be
raised by more than 1%.
C) If there is an inflationary gap, there will be a corresponding reduction
in interest rates.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements regarding the relationship
between economic factors and the nominal inflation rate is true?
A) If the inflationary expectation goes up, the market interest rate
decreases.
B) For every 1% increase in inflation, the nominal interest rate should be
raised by more than 1%.
C) If there is an inflationary gap, there will be a corresponding reduction
in interest rates.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Given an inflation rate of 4% and a real rate of 5%, what is the
corresponding nominal rate?
A) 9.2%
B) 9%
C) 4%
D) 109.2%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Given an inflation rate of 4% and a real rate of 5%, what is the
corresponding nominal rate?
A) 9.2%
B) 9%
C) 4%
D) 109.2%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following describes a difference between stocks and
bonds?
A) Bonds always have a defined term while stocks may be outstanding
indefinitely.
B) Stocks can be resold on a secondary market, while bonds cannot.
C) All of these answers.
D) Stockholders generally have an equity stake in the business while
bondholders have a creditor stake.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following describes a difference between stocks and
bonds?
A) Bonds always have a defined term while stocks may be outstanding
indefinitely.
B) Stocks can be resold on a secondary market, while bonds cannot.
C) All of these answers.
D) Stockholders generally have an equity stake in the business while
bondholders have a creditor stake.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following ratings would indicate a "junk bond?"
A) A Baa3 rating by Moody's.
B) A BBB- rating from Standard & Poors.
C) BBB(low) by DBRS.
D) A Ba rating by Moody's.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following ratings would indicate a "junk bond?"
A) A Baa3 rating by Moody's.
B) A BBB- rating from Standard & Poors.
C) BBB(low) by DBRS.
D) A Ba rating by Moody's.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A bond has a coupon rate of 7% and a yield to maturity rate of
8%. The bond is ____.
A) selling at par.
B) selling at a premium.
C) selling at yield
D) selling at a discount.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A bond has a coupon rate of 7% and a yield to maturity rate of
8%. The bond is ____.
A) selling at par.
B) selling at a premium.
C) selling at yield
D) selling at a discount.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following is the definition of the Macaulay duration?
A) The percentage change in price for a unit change in yield.
B) The price sensitivity of a bond.
C) The weighted average time, measured in years, until cash flows are
received.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following is the definition of the Macaulay duration?
A) The percentage change in price for a unit change in yield.
B) The price sensitivity of a bond.
C) The weighted average time, measured in years, until cash flows are
received.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A bond grants its holder the option to sell the bond back to the
issuer at a fixed price at a fixed date prior to the bond's maturity.
When evaluating the bond's value, the company should calculate
the bond's _____.
A) yield to call.
B) yield to put.
C) yield to worst.
D) yield to discount.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A bond grants its holder the option to sell the bond back to the
issuer at a fixed price at a fixed date prior to the bond's maturity.
When evaluating the bond's value, the company should calculate
the bond's _____.
A) yield to call.
B) yield to put.
C) yield to worst.
D) yield to discount.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements regarding the calculation and
use of inflation premiums is true?
A) Actual interest rates are viewed as being the nominal interest rate
minus the inflation premium.
B) An inflation premium is caused by lender compensating for expected
inflation.
C) All of these answers.
D) The inflation premium varies based on each analyst's expectations
regarding future inflation.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements regarding the calculation and
use of inflation premiums is true?
A) Actual interest rates are viewed as being the nominal interest rate
minus the inflation premium.
B) An inflation premium is caused by lender compensating for expected
inflation.
C) All of these answers.
D) The inflation premium varies based on each analyst's expectations
regarding future inflation.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following specifications regarding a bond is
contained in the bond's indenture?
A) The maturity date.
B) The interest rate.
C) All of these answers.
D) The bond's pledge.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following specifications regarding a bond is
contained in the bond's indenture?
A) The maturity date.
B) The interest rate.
C) All of these answers.
D) The bond's pledge.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements regarding bonds and par values
is true?
A) The par value of a bond never changes.
B) Corporate bonds usually have par values equal to $10,000.
C) All of these answers.
D) A bond selling at par has a coupon rate so the bond is worth its
redemption value at maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements regarding bonds and par values
is true?
A) The par value of a bond never changes.
B) Corporate bonds usually have par values equal to $10,000.
C) All of these answers.
D) A bond selling at par has a coupon rate so the bond is worth its
redemption value at maturity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements about zero coupon bonds is
NOT true?
A) U.S. Treasury bills and saving bonds are example of zero coupon
bonds.
B) When a bond is "stripped," it is split into two parts; the principal and
the coupons, or "residue."
C) The impact of interest rate fluctuations on zero coupon bonds is higher
than for coupon bonds.
D) Zero coupon bonds are particularly popular with pension and
insurance companies.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements about zero coupon bonds is
NOT true?
A) U.S. Treasury bills and saving bonds are example of zero coupon
bonds.
B) When a bond is "stripped," it is split into two parts; the principal and
the coupons, or "residue."
C) The impact of interest rate fluctuations on zero coupon bonds is higher
than for coupon bonds.
D) Zero coupon bonds are particularly popular with pension and
insurance companies.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following factors influence the reinvestment risk
associated with a bond?
A) The maturity of the bond.
B) The interest rate of the bond.
C) All of these answers.
D) The market interest rate.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following factors influence the reinvestment risk
associated with a bond?
A) The maturity of the bond.
B) The interest rate of the bond.
C) All of these answers.
D) The market interest rate.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following explains the difference between price risk
and reinvestment risk?
A) Price risk is positively correlated to interest rates, reinvestment risk is
inversely correlated.
B) Price risk is positively correlated to maturity, reinvestment risk is
inversely correlated.
C) For corporate planning, a bond's price risk is a bigger concern than its
reinvestment risk.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following explains the difference between price risk
and reinvestment risk?
A) Price risk is positively correlated to interest rates, reinvestment risk is
inversely correlated.
B) Price risk is positively correlated to maturity, reinvestment risk is
inversely correlated.
C) For corporate planning, a bond's price risk is a bigger concern than its
reinvestment risk.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements about the disadvantages of
bonds as investments is correct?
A) When a bond issuer is able to pay off a bond early, the bond is subject
to event risk.
B) Interest rate risk is only a problem if the bondholder decides to hold
the bond until it matures.
C) Bonds are subject to prepayment risk, credit risk, reinvestment risk,
and yield curve risk.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements about the disadvantages of
bonds as investments is correct?
A) When a bond issuer is able to pay off a bond early, the bond is subject
to event risk.
B) Interest rate risk is only a problem if the bondholder decides to hold
the bond until it matures.
C) Bonds are subject to prepayment risk, credit risk, reinvestment risk,
and yield curve risk.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following predictions based on a description of the
yield curve is correct?
A) A normal yield curve suggests that interest rates will be raised in the
future.
B) All of these answers.
C) A flat yield curve suggest that interest rates will be cut.
D) An inverted yield curve suggests that interest rates will be dramatically
cut.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following predictions based on a description of the
yield curve is correct?
A) A normal yield curve suggests that interest rates will be raised in the
future.
B) All of these answers.
C) A flat yield curve suggest that interest rates will be cut.
D) An inverted yield curve suggests that interest rates will be dramatically
cut.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following can occur to a bondholder if the issuing
company defaults?
A) The bondholder will not be paid the bond's principal and any
outstanding interest payments.
B) The bondholder's cash flows may be disrupted.
C) The bondholder may have to pay collection costs.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following can occur to a bondholder if the issuing
company defaults?
A) The bondholder will not be paid the bond's principal and any
outstanding interest payments.
B) The bondholder's cash flows may be disrupted.
C) The bondholder may have to pay collection costs.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements regarding the bond purchasing
process is correct?
A) Some insurance companies are legally required to own bonds to
match their liabilities.
B) Individual investors can purchase bonds through a broker or a bond
fund.
C) Bond funds generally pay higher interest than certificates of deposits
and money market accounts.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements regarding the bond purchasing
process is correct?
A) Some insurance companies are legally required to own bonds to
match their liabilities.
B) Individual investors can purchase bonds through a broker or a bond
fund.
C) Bond funds generally pay higher interest than certificates of deposits
and money market accounts.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following is a correct description of a type of yield
curve?
A) When all maturities have similar yields, the resulting curve is flat.
B) All of these answers.
C) When long-term yields fall below short-term yields, the curve is
inverted.
D) When long-term yields are higher than short-term yields, the curve is
normal.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following is a correct description of a type of yield
curve?
A) When all maturities have similar yields, the resulting curve is flat.
B) All of these answers.
C) When long-term yields fall below short-term yields, the curve is
inverted.
D) When long-term yields are higher than short-term yields, the curve is
normal.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following is a reason bond markets may lack price
transparency.
A) There are a large number of debt issues outstanding.
B) Bond markets sometimes lack a centralized exchange or trading
system.
C) All of these answers.
D) In the US, Europe and Japan, bonds are traded in dealer-based overthe-counter markets.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following is a reason bond markets may lack price
transparency.
A) There are a large number of debt issues outstanding.
B) Bond markets sometimes lack a centralized exchange or trading
system.
C) All of these answers.
D) In the US, Europe and Japan, bonds are traded in dealer-based overthe-counter markets.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following is NOT a class of credit ratings that a
Nationally Recognized Statistical Rating Organization (NRSRO)
can register to review?
A) Individuals.
B) Insurance companies.
C) Financial institutions, brokers, and dealers.
D) Issuers of government securities.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following is NOT a class of credit ratings that a
Nationally Recognized Statistical Rating Organization (NRSRO)
can register to review?
A) Individuals.
B) Insurance companies.
C) Financial institutions, brokers, and dealers.
D) Issuers of government securities.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
When an issuing company goes bankrupt, the bondholders are
always paid before which of the following the parties?
A) The bank lenders.
B) The company's shareholders.
C) The company's trade creditors.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
When an issuing company goes bankrupt, the bondholders are
always paid before which of the following the parties?
A) The bank lenders.
B) The company's shareholders.
C) The company's trade creditors.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A zero-coupon bond has a face value of $1000 and a market
value of $800. The bond will mature in 5 years. What is its yield to
maturity?
A) 104.56%
B) -4.37%
C) 4.56%
D) 205.17%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A zero-coupon bond has a face value of $1000 and a market
value of $800. The bond will mature in 5 years. What is its yield to
maturity?
A) 104.56%
B) -4.37%
C) 4.56%
D) 205.17%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following entities "holds" the indenture and is
responsible for enforcing the contract?
A) The bondholders.
B) A trustee.
C) The shareholders.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following entities "holds" the indenture and is
responsible for enforcing the contract?
A) The bondholders.
B) A trustee.
C) The shareholders.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
A bond has a face value of $1000 and a contractual interest rate
of 5%. The bond has quarterly interest payments. The market
interest rate is 4%. The bond matures in 5 years and will pay
$1000. What is the bond's current market price?
A) $1135.90
B) $875.38
C) $679.52
D) $1044.52
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
A bond has a face value of $1000 and a contractual interest rate
of 5%. The bond has quarterly interest payments. The market
interest rate is 4%. The bond matures in 5 years and will pay
$1000. What is the bond's current market price?
A) $1135.90
B) $875.38
C) $679.52
D) $1044.52
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
An annuity has an interest rate of 7% and makes a quarterly
payment of $2000. The annuity is to last for 5 years. What is the
present value of the annuity.
A) $8,200.40
B) $21,188.03
C) $32,801.58
D) $2,118.80
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
An annuity has an interest rate of 7% and makes a quarterly
payment of $2000. The annuity is to last for 5 years. What is the
present value of the annuity.
A) $8,200.40
B) $21,188.03
C) $32,801.58
D) $2,118.80
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following must be true before a company will refund
one of its bond issues?
A) The price of the old bond is at par.
B) Interest rates in the market are at most equal to the coupon rate on
the old bond.
C) All of these answers.
D) The sinking fund has accumulated enough money to retire the bond
issue.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following must be true before a company will refund
one of its bond issues?
A) The price of the old bond is at par.
B) Interest rates in the market are at most equal to the coupon rate on
the old bond.
C) All of these answers.
D) The sinking fund has accumulated enough money to retire the bond
issue.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following influences a bond's price risk?
A) The possibility the issuing company's credit rating will be decreased.
B) All of these answers.
C) The possibility that market interest rates will increase.
D) Mutual funds, pension managers and banks divest themselves of the
issuing company's bonds.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following influences a bond's price risk?
A) The possibility the issuing company's credit rating will be decreased.
B) All of these answers.
C) The possibility that market interest rates will increase.
D) Mutual funds, pension managers and banks divest themselves of the
issuing company's bonds.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements regarding a bond's time to
maturity is true?
A) United States Treasury Bonds have maturities between six to twelve
years.
B) The fair price of a "straight bond" is the sum of its discounted expected
cash flows.
C) A bond with a shorter maturity generally has a higher price than one
with a longer maturity.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements regarding a bond's time to
maturity is true?
A) United States Treasury Bonds have maturities between six to twelve
years.
B) The fair price of a "straight bond" is the sum of its discounted expected
cash flows.
C) A bond with a shorter maturity generally has a higher price than one
with a longer maturity.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements regarding the advantages of
bonds as an investment, are true?
A) Bonds are more liquid than stock.
B) The market price of bonds are less volatile than stocks.
C) If a company goes bankrupt, its bondholders will recover the entirety
of the bond's principal.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements regarding the advantages of
bonds as an investment, are true?
A) Bonds are more liquid than stock.
B) The market price of bonds are less volatile than stocks.
C) If a company goes bankrupt, its bondholders will recover the entirety
of the bond's principal.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following statements about floating rate bonds
(FRBs) is NOT true?
A) In Europe, FRBs are generally issued by banks.
B) An FRB with a maximum coupon is called a "capped FRB."
C) FRBs carry significant interest rate risk; its price declines as market
rates rise.
D) An FRBs spread is a rate that remains constant.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following statements about floating rate bonds
(FRBs) is NOT true?
A) In Europe, FRBs are generally issued by banks.
B) An FRB with a maximum coupon is called a "capped FRB."
C) FRBs carry significant interest rate risk; its price declines as market
rates rise.
D) An FRBs spread is a rate that remains constant.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
You purchase a bond from a corporation that allows you to
exchange the bond for some of the company's stock. You just
purchased ________.
A) an asset-based security.
B) a convertible bond.
C) a registered bond.
D) a serial bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
You purchase a bond from a corporation that allows you to
exchange the bond for some of the company's stock. You just
purchased ________.
A) an asset-based security.
B) a convertible bond.
C) a registered bond.
D) a serial bond.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following is the correct order of steps to take when
making a decision to refund a bond issue?
A) Calculate the PV of interest savings, calculate the PV or refunding,
calculate the net investment.
B) Calculate the PV of interest savings, calculate the net investment,
calculate the PV or refunding.
C) Calculate the net investment, calculate the PV or refunding, calculate
the PV of interest savings,.
D) Calculate the PV of interest savings, calculate the net investment,
calculate the PV or refunding.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following is the correct order of steps to take when
making a decision to refund a bond issue?
A) Calculate the PV of interest savings, calculate the PV or refunding,
calculate the net investment.
B) Calculate the PV of interest savings, calculate the net investment,
calculate the PV or refunding.
C) Calculate the net investment, calculate the PV or refunding, calculate
the PV of interest savings,.
D) Calculate the PV of interest savings, calculate the net investment,
calculate the PV or refunding.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which of the following are debt instruments that companies use
as investments? Choose one answer.
A) Stocks
B) Bank Loans
C) Unpaid Accounts
D) Bonds
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which of the following are debt instruments that companies use
as investments? Choose one answer.
A) Stocks
B) Bank Loans
C) Unpaid Accounts
D) Bonds
Free to share, print, make copies and changes. Get yours at www.boundless.com
Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/
Bond Valuation
The cost of money is related to the concept of ___.
A) the time value of money.
B) All of these answers.
C) time preference.
D) opportunity cost.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
The cost of money is related to the concept of ___.
A) the time value of money.
B) All of these answers.
C) time preference.
D) opportunity cost.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Which yield curve theory is based on the premises that financial
instruments of different terms are not substitutable and therefore
the supply and demand in the markets for short-term and longterm instruments is determined largely independently?
A) The expectation hypothesis.
B) The liquidity premium theory.
C) All of these answers.
D) The segmented market hypothesis.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
Which yield curve theory is based on the premises that financial
instruments of different terms are not substitutable and therefore
the supply and demand in the markets for short-term and longterm instruments is determined largely independently?
A) The expectation hypothesis.
B) The liquidity premium theory.
C) All of these answers.
D) The segmented market hypothesis.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
An investment has a risk premium of 5% and a liquidity premium
of 4%. The nominal interest rate on the instrument is 8%.
Expected inflation is 3%. What is the nominal interest rate of the
bond?
A) 17%
B) 20%
C) 16%
D) 15%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
An investment has a risk premium of 5% and a liquidity premium
of 4%. The nominal interest rate on the instrument is 8%.
Expected inflation is 3%. What is the nominal interest rate of the
bond?
A) 17%
B) 20%
C) 16%
D) 15%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
When crowding out occurs, investment spending decreases. What
causes this phenomenon?
A) The total money supply is increased, increasing interest rates.
B) The total money supply is increased, decreasing interest rates.
C) The total money supply is decreased, increasing interest rates.
D) The total money supply is decreased, decreasing interest rates.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
When crowding out occurs, investment spending decreases. What
causes this phenomenon?
A) The total money supply is increased, increasing interest rates.
B) The total money supply is increased, decreasing interest rates.
C) The total money supply is decreased, increasing interest rates.
D) The total money supply is decreased, decreasing interest rates.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Bond Valuation
Attribution
• Wikipedia. "Reinvestment risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Reinvestment_risk
• Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield+to+maturity
• Wikipedia. "Maturity date." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Maturity_date
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Maturity
• Wikipedia. "puttable." CC BY-SA 3.0 http://en.wikipedia.org/wiki/puttable
• Wiktionary. "callable." CC BY-SA 3.0 http://en.wiktionary.org/wiki/callable
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Maturity
• Wikipedia. "Bond valuation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_valuation
• Wiktionary. "money market." CC BY-SA 3.0 http://en.wiktionary.org/wiki/money+market
• Wikipedia. "duration." CC BY-SA 3.0 http://en.wikipedia.org/wiki/duration
• Wikipedia. "Transparency (market)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Transparency_(market)
• Wiktionary. "transparency." CC BY-SA 3.0 http://en.wiktionary.org/wiki/transparency
• Wikipedia. "market liquidity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/market+liquidity
• Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_to_maturity
• Wikipedia. "Bond pricing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_pricing
• Wiktionary. "discount rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/discount+rate
• Wikipedia. "asset-backed securities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/asset-backed+securities
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Bond rating." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_rating
• Wikipedia. "Bond option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_option
• Wikipedia. "internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/internal+rate+of+return
• Wikipedia. "quote." CC BY-SA 3.0 http://en.wikipedia.org/wiki/quote
• Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_to_maturity
• Wikipedia. "Bond pricing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_pricing
• Wiktionary. "discount rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/discount+rate
• Wikipedia. "Government debt." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Government_debt#Government_and_sovereign_bonds
• Wikipedia. "Government bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Government_bond
• Wiktionary. "purchasing power parity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/purchasing+power+parity
• Wiktionary. "purchasing power." CC BY-SA 3.0 http://en.wiktionary.org/wiki/purchasing+power
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "Zero-coupon bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Zero-coupon_bond
• Wikipedia. "immunize." CC BY-SA 3.0 http://en.wikipedia.org/wiki/immunize
• Wikipedia. "Pension funds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Pension+funds
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Coupon
• Wikipedia. "Coupon (bond)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Coupon_(bond)
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time+value+of+money
• Wikipedia. "Interest." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Interest rate risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest_rate_risk
• Wiktionary. "liquidity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liquidity
• Wiktionary. "abscond." CC BY-SA 3.0 http://en.wiktionary.org/wiki/abscond
• Wiktionary. "inflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inflation
• Wikipedia. "Duration (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Duration_(finance)
• Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield+to+maturity
• Wikipedia. "Convexity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Convexity
• Wikipedia. "Par value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Par_value
• Wikipedia. "Bond pricing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_pricing
• Wikipedia. "inflation-linked bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/inflation-linked+bonds
• Wikipedia. "Bond refunding." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_refunding
• Wikipedia. "sinking fund." CC BY-SA 3.0 http://en.wikipedia.org/wiki/sinking+fund
• Wikipedia. "Yield curve." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_curve
• Wikipedia. "Term structure of interest rates." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Term_structure_of_interest_rates
• Wikipedia. "treasury bill." CC BY-SA 3.0 http://en.wikipedia.org/wiki/treasury+bill
• Wikipedia. "Treasury bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Treasury+bond
• Wikipedia. "Interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest_rate
• Wikipedia. "Output gap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Output_gap
• Wikipedia. "Taylor rule." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Taylor_rule
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Recessionary gap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Recessionary+gap
• Wikipedia. "inflationary gap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/inflationary+gap
• Wikipedia. "Real interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Real+interest+rate
• Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY
http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves-spreads.html
• Wikipedia. "Yield curve." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_curve
• Wikipedia. "Treasury bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Treasury+bond
• Wikipedia. "treasury bill." CC BY-SA 3.0 http://en.wikipedia.org/wiki/treasury+bill
• Wikipedia. "Term structure." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Term_structure#Types_of_yield_curve
• Wikipedia. "Term structure of interest rates." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Term_structure_of_interest_rates
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Market_Price
• Wikipedia. "premium." CC BY-SA 3.0 http://en.wikipedia.org/wiki/premium
• Wiktionary. "Liquidity premium." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Liquidity+premium
• Wikipedia. "risk premium." CC BY-SA 3.0 http://en.wikipedia.org/wiki/risk+premium
• Wikipedia. "Present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Present_value
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/Opportunity Cost." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/Opportunity_Cost
• Wikipedia. "Interest." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest
• Wiktionary. "interest rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/interest+rate
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wikipedia. "Real versus nominal value (economics)." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Real_versus_nominal_value_(economics)
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest_rate
• Wikibooks. "Principles of Finance/Section 1/Chapter/Financial Markets and Institutions/Interest." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter/Financial_Markets_and_Institutions/Interest
• Wikipedia. "Crowding out (economics)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Crowding_out_(economics)
• Wiktionary. "monetary policy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/monetary+policy
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "inflation-linked bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/inflation-linked+bonds
• Wikipedia. "Zero coupon bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Zero+coupon+bonds
• Wikipedia. "Convertible bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Convertible+bonds
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "Exchange rate risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Exchange+rate+risk
• Wikipedia. "Reinvestment risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Reinvestment+risk
• Wikipedia. "Bond indenture." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_indenture
• Wikipedia. "Prospectus (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Prospectus_(finance)
• Wiktionary. "indenture." CC BY-SA 3.0 http://en.wiktionary.org/wiki/indenture
• Wikipedia. "convertibility." CC BY-SA 3.0 http://en.wikipedia.org/wiki/convertibility
• Wikipedia. "public debt offerings." CC BY-SA 3.0 http://en.wikipedia.org/wiki/public+debt+offerings
• Wikipedia. "Bond pricing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_pricing
• Wikipedia. "Annuity (finance theory)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annuity_(finance_theory)
• Wikipedia. "Payment schedule." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payment_schedule
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wiktionary. "annuity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/annuity
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "Treasury bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Treasury+bonds
• Wikipedia. "corporate bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/corporate+bonds
• Wikipedia. "municipal bonds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/municipal+bonds
• Wikipedia. "Pull to par." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Pull_to_par
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Principal
• Wikipedia. "Par value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Par_value
• Wiktionary. "par value." CC BY-SA 3.0 http://en.wiktionary.org/wiki/par+value
• Wikipedia. "resale market." CC BY-SA 3.0 http://en.wikipedia.org/wiki/resale+market
• Wikipedia. "Sinking fund." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sinking_fund
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "Bond option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_option
• Wikipedia. "debentures." CC BY-SA 3.0 http://en.wikipedia.org/wiki/debentures
• Wikipedia. "Preferred Stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Preferred+Stock
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Others
• Wikipedia. "clean price." CC BY-SA 3.0 http://en.wikipedia.org/wiki/clean+price
• Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield+to+maturity
• Wikipedia. "Floating-rate bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Floating-rate_bond
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Floating rate note." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Floating_rate_note
• Wikipedia. "duration." CC BY-SA 3.0 http://en.wikipedia.org/wiki/duration
• Wikipedia. "LIBOR." CC BY-SA 3.0 http://en.wikipedia.org/wiki/LIBOR
• Wikipedia. "Credit risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Credit_risk
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "liquidated." CC BY-SA 3.0 http://en.wikipedia.org/wiki/liquidated
• Wiktionary. "insolvent." CC BY-SA 3.0 http://en.wiktionary.org/wiki/insolvent
• Wikipedia. "Chapter 11, Title 11, United States Code." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wiktionary. "liquidation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liquidation
• Wiktionary. "recapitalization." CC BY-SA 3.0 http://en.wiktionary.org/wiki/recapitalization
• Wikipedia. "Interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest_rate#Real_vs_nominal_interest_rates
• Wikipedia. "Nominal interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Nominal_interest_rate
• Wikipedia. "Real interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Real_interest_rate
• Wiktionary. "purchasing power." CC BY-SA 3.0 http://en.wiktionary.org/wiki/purchasing+power
• Wikipedia. "Real interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Real_interest_rate
• Wikipedia. "Fisher equation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fisher_equation
• Wikipedia. "Real interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Real_interest_rate
• Wikipedia. "systematic risks." CC BY-SA 3.0 http://en.wikipedia.org/wiki/systematic+risks
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Reinvestment risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Reinvestment_risk
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "duration." CC BY-SA 3.0 http://en.wikipedia.org/wiki/duration
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "mutual funds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/mutual+funds
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "tranches." CC BY-SA 3.0 http://en.wikipedia.org/wiki/tranches
• Wiktionary. "gross domestic product." CC BY-SA 3.0 http://en.wiktionary.org/wiki/gross+domestic+product
• Wikipedia. "LIBOR." CC BY-SA 3.0 http://en.wikipedia.org/wiki/LIBOR
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "Broker." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Broker
• Wikipedia. "Bond fund." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_fund
• Wikipedia. "hedge funds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/hedge+funds
• Wikipedia. "Pension funds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Pension+funds
• Wikipedia. "bond funds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/bond+funds
• Wikipedia. "Bond rating." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_rating
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "credit rating agencies." CC BY-SA 3.0 http://en.wikipedia.org/wiki/credit+rating+agencies
• Wikipedia. "Callable bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Callable_bond
Free to share, print, make copies and changes. Get yours at www.boundless.com
Bond Valuation
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Maturity
• Wikipedia. "Call option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Call_option
• Wiktionary. "par." CC BY-SA 3.0 http://en.wiktionary.org/wiki/par
• Wikipedia. "straight bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/straight+bond
Free to share, print, make copies and changes. Get yours at www.boundless.com

similar documents