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Description
Flashcards by Nafisa Zahra, updated more than 1 year ago
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Created by Nafisa Zahra
about 11 years ago
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| Question | Answer |
| What is the realised yield and how do you calculate it? | The realised yield is based on the actual reinvestment rate in each period and the total cash received at maturity. We assume coupons are reinvested at the yield at the time |
| What are callable bonds? | Callable bonds can be purchased at a specified call price by the issuer before the maturity date. This will be exercised when interest rates decline. |
| What are puttable bonds? | Puttable bonds give the holder the right to sell back or extend the bond. This will probably be done when interest rates are high. |
| Why do bond prices go down when interest rates go up? | Market rate changes do not affect bonds interest payments or principal repayments. An investor will not be as willing to pay a higher price for a bond which is why the price is lower to compensate. Also mathematically the formula shows an inverse relationship between interest rates and bond prices. |
| Consider a bond with coupon rate 10% and yield to maturity 8%. If YTM remains constant in 1 year will price be higher, lower or unchanged? | Will be lower. Bond is currently above par and as time passes it will approach par |
| Know the theoretical and mathematical difference between YTM and realised compound yield | A bond's YTM is based on current price and therefore changes overtime. It makes the incorrect assumption that the reinvestment rate = YTM. Realised compound yield is based on actual reinvestment rate in each period and total cash received at maturity. We assume coupons are reinvested at the yield at the time. |
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