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Questions and Answers
What is the primary difference between borrowing from the bond market and borrowing from a bank for a large reputable company?
What is the primary difference between borrowing from the bond market and borrowing from a bank for a large reputable company?
- There is no significant difference in terms between borrowing from the bond market and borrowing from a bank
- Borrowing from the bond market and borrowing from a bank offer the same terms
- Borrowing from a bank typically offers better terms than borrowing from the bond market
- Borrowing from the bond market typically offers better terms than borrowing from a bank (correct)
What happens to private consumption and private investments when the government borrows from the bond market?
What happens to private consumption and private investments when the government borrows from the bond market?
- Private consumption falls by the same amount that private investments fall (correct)
- Private consumption increases while private investments fall
- Private consumption and private investments remain unaffected
- Private consumption falls while private investments increase
How does the demand for savings and the interest rate change when the government borrows from the bond market?
How does the demand for savings and the interest rate change when the government borrows from the bond market?
- Demand for savings increases and interest rate increases (correct)
- Demand for savings decreases and interest rate increases
- Demand for savings increases and interest rate decreases
- Demand for savings decreases and interest rate decreases
What is the relationship between bond ratings and the interest rate charged?
What is the relationship between bond ratings and the interest rate charged?
How does the presence of collateral affect the interest rate charged for borrowing?
How does the presence of collateral affect the interest rate charged for borrowing?
What is the original maturity period for securities in the capital market?
What is the original maturity period for securities in the capital market?
What are the primary issuers of securities in the capital market?
What are the primary issuers of securities in the capital market?
What is the key metric for bond investors to measure the yield to maturity?
What is the key metric for bond investors to measure the yield to maturity?
Which type of corporate bond has lower ratings and higher interest rates?
Which type of corporate bond has lower ratings and higher interest rates?
What are used to lower risk and transfer credit risk to others in the bond market?
What are used to lower risk and transfer credit risk to others in the bond market?
What affected borrowing costs and investment behavior of firms after its introduction in 1982?
What affected borrowing costs and investment behavior of firms after its introduction in 1982?
What measures the weighted average time to receive the bond's cash flows and serves as a risk measure for bond price sensitivity to interest rate changes?
What measures the weighted average time to receive the bond's cash flows and serves as a risk measure for bond price sensitivity to interest rate changes?
What led to concerns during the 2008 financial crisis due to its unregulated growth?
What led to concerns during the 2008 financial crisis due to its unregulated growth?
What type of bond has collateral and is considered to have lower risk?
What type of bond has collateral and is considered to have lower risk?
What is the approximate change in the value of the portfolio if the general interest rate rises from 8% to 8.5%?
What is the approximate change in the value of the portfolio if the general interest rate rises from 8% to 8.5%?
What are the risks an investor would face when making an investment in corporate bonds?
What are the risks an investor would face when making an investment in corporate bonds?
What is the yield to maturity on a zero-coupon bond with a face value of $1000, priced at $850, and maturing in 4 years?
What is the yield to maturity on a zero-coupon bond with a face value of $1000, priced at $850, and maturing in 4 years?
What drives bond prices?
What drives bond prices?
What do investors think about when investing in bonds?
What do investors think about when investing in bonds?
What is the effect of a higher coupon rate on the duration of a bond?
What is the effect of a higher coupon rate on the duration of a bond?
What is the relationship between maturity lengthening and duration?
What is the relationship between maturity lengthening and duration?
What is the % change in the price of a bond in relation to its duration and the change in interest rate?
What is the % change in the price of a bond in relation to its duration and the change in interest rate?
What are the risks associated with an investment in municipal and corporate bonds?
What are the risks associated with an investment in municipal and corporate bonds?
What type of bonds are tax-free and used for public projects?
What type of bonds are tax-free and used for public projects?
Which type of bonds are issued by government-sponsored entities?
Which type of bonds are issued by government-sponsored entities?
What type of bonds protect against inflation but offer lower interest rates?
What type of bonds protect against inflation but offer lower interest rates?
In which type of bonds are restrictive covenants and call provisions common?
In which type of bonds are restrictive covenants and call provisions common?
Which type of bonds have no default risk in the US due to the ability to print money?
Which type of bonds have no default risk in the US due to the ability to print money?
What type of bonds are automatically taxed?
What type of bonds are automatically taxed?
Which type of bonds are used for financing operations?
Which type of bonds are used for financing operations?
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Study Notes
Understanding Treasury Bonds, Municipal Bonds, and Corporate Bonds
- Treasury issues T-bills, notes, and bonds to finance operations
- No default risk in US due to ability to print money
- Importance of risk-free rate for company valuations
- Interest rate risk increases with longer maturity instruments
- In crises, inverse yield curve occurs due to flight to safety
- TIPS protect against inflation but offer lower interest rates
- Agency bonds are issued by gov. sponsored entities
- Municipal bonds are tax-free and used for public projects
- Two types of municipal bonds: general obligation and revenue
- Corporate bonds vary in face value, interest payment, and risk
- Registered bonds are automatically taxed; bearer bonds are not
- Restrictive covenants and call provisions are common in corporate bonds
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