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Social Science
Economics
Finance
Bond Pricing (Chpt 4)
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Terms in this set (21)
Simple Loan
when the lender provides the borrower with an amount of funds (principal) that must be repaid to the lender at the maturity date, along with an additional payment for the interest
Interest Rate
interest payment / amount of loan
Future Value (FV)
PV x (1 + i)^(n)
PV = present value of cash flow or payment
i = interest rate (decimal)
n = (# of years)
One Basis Point (BP)
0.01% is equal to
Present Value (PV)
FV / (1 + i)^(n)
FV = future value of cash flow or payment
i = interest rate (decimal)
n = (# of years)
Present Value (PV) is higher when:
when FV is higher, n is shorter, and i is lower
Coupon Bonds
bonds that make periodic interest payments and repay the principal at maturity.
Examples: U.S. Treasury Bonds and most corporate bonds
Discount (Zero-Coupon) Bonds
bonds that promise a single future payment. sold at some price, P, and pays a larger amount (FV) after t years. NO periodic interest payment
Example: U.S. Treasury Bill
Consol Bonds
bonds that make periodic interest payments forever, never repaying the principal that was borrowed.
Fixed-Payment (Fully Amortized) Loan
when the lender provides the borrower with an amount of funds, which must be repaid by making the same payment every period consisting of the principal and interest for a set number of years.
Yield to Maturity (YTM)
Another name for the interest rate
The YTM = Coupon Rate
When the coupon bond is priced at its face value
Negative; falls; rises
The price of coupon bond and the yield to maturity are __________ related; as the yield to maturity _____, the price of the bond _______.
Greater; below
The yield to maturity is _________ than the coupon rate when the bond price is _________ its face value
Characteristics of consol bond
- infinite maturity
- no face value
- fixed coupon payment of C forever
Holding Period Return
the _____________ a bond and selling it before maturity
Fall; capital loss
A rise interests rates is associated with a _______ in bond prices, resulting in ________ if the holding period < time of maturity
Lower; increase
The more distant a bond's maturity, the _______ the rate of return that occurs as a result of an __________ in the interest rates
Interest-Rate Risk
change in bond price due to change in interest rate
Long; shorter
Prices and returns for ____-term bonds are more volatile than those for _______-term bonds
interest-rate risk
There is no ____________ for a bond whose time to maturity matches the holding period
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