Podcast Beta
Questions and Answers
What is the par value of a bond typically?
1000
What rate is set by the company at the time of issuing a bond?
coupon rate
What does YTM stand for in bond valuation?
yield to maturity
Creditors have legal recourse if interest payments are missed on debt.
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Which of the following statements is true for Bond X?
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What is the annual coupon payment for a bond with a coupon rate of 7% and a par value of $1,000?
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What is current yield defined as?
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The relationship between coupon rate and yield to maturity can vary due to _____ factors.
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Match the following bond concepts with their definitions:
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Study Notes
Bond Basics
- Bonds are debt securities that represent a loan made by an investor to a borrower (typically, a corporation or government).
- When a bond is issued, the borrower promises to make regular interest payments (coupons) to the bondholder and repay the principal at maturity.
- Par Value: The payment to be made to the bondholder at maturity. Typically, this is $1,000.
- Coupon Rate: The annual interest rate paid on the bond. It is fixed when the bond is issued.
- Coupon: The regular interest payment received by the bondholder per year.
- Maturity Date: The date the bond expires and the par value is repaid to the bondholder.
- Yield to Maturity (YTM): The expected rate of return an investor can expect to receive if they hold the bond until maturity, taking into account future interest payments and the price paid for the bond.
Yield to Maturity, Coupon Rate, and Current Yield
- The coupon rate is set by the bond issuer and is fixed.
- The YTM is dependent on market conditions, economic factors, and company-specific factors and is therefore variable.
- Current Yield is the annual coupon payment divided by the bond's current market price.
- The current yield does not account for the potential capital gain or loss that may occur due to changes in the bond's price.
Bond Basics - An Example
- Hertz Corp. bond example shows a bond with a price of 91.50, a coupon rate of 6.35%, a maturity date of June 15, 2030, a yield to maturity of 7.5%, and a current yield of 6.94%.
- The price of 91.50 is quoted as a percentage of the bond's par value.
- The bond's YTM is higher than its current yield, suggesting that its price is expected to rise in the future.
- The bond has a 'B' rating, which indicates it may be more risky than higher-rated bonds.
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Description
This quiz encompasses foundational concepts of bonds, including definitions of key terms such as par value, coupon rate, and yield to maturity. Test your understanding of how bonds operate and the factors affecting their value over time.
