30 Questions
What is the primary difference between borrowing from the bond market and borrowing from a bank for a large reputable company?
Borrowing from the bond market typically offers better terms than borrowing from a bank
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
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
What is the relationship between bond ratings and the interest rate charged?
Higher bond ratings result in lower interest rates
How does the presence of collateral affect the interest rate charged for borrowing?
If the borrower has collateral, the interest rate decreases
What is the original maturity period for securities in the capital market?
More than 1 year
What are the primary issuers of securities in the capital market?
Governments are debt issuers, and corporations are stock and bond issuers
What is the key metric for bond investors to measure the yield to maturity?
Duration
Which type of corporate bond has lower ratings and higher interest rates?
Junk bonds
What are used to lower risk and transfer credit risk to others in the bond market?
Credit default swaps
What affected borrowing costs and investment behavior of firms after its introduction in 1982?
Moody's
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?
Duration
What led to concerns during the 2008 financial crisis due to its unregulated growth?
Credit default swaps
What type of bond has collateral and is considered to have lower risk?
Secured bonds with collateral
What is the approximate change in the value of the portfolio if the general interest rate rises from 8% to 8.5%?
-$729,583
What are the risks an investor would face when making an investment in corporate bonds?
Default risk, interest rate risk, exchange rate risk, inflation risk
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?
4.1466%
What drives bond prices?
Market conditions, ratings, age of bond
What do investors think about when investing in bonds?
Relatively low risk vs. equity, dependable cash flows, interest rate risk
What is the effect of a higher coupon rate on the duration of a bond?
Shorter duration
What is the relationship between maturity lengthening and duration?
Duration rises
What is the % change in the price of a bond in relation to its duration and the change in interest rate?
The % change in price of bond = $- ext{duration} imes ext{change in interest rate}$
What are the risks associated with an investment in municipal and corporate bonds?
Default risk, interest rate risk, exchange rate risk
What type of bonds are tax-free and used for public projects?
Municipal bonds
Which type of bonds are issued by government-sponsored entities?
Agency bonds
What type of bonds protect against inflation but offer lower interest rates?
TIPS
In which type of bonds are restrictive covenants and call provisions common?
Corporate bonds
Which type of bonds have no default risk in the US due to the ability to print money?
Treasury bonds
What type of bonds are automatically taxed?
Registered bonds
Which type of bonds are used for financing operations?
T-bills
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
Test your knowledge of Treasury bonds, municipal bonds, and corporate bonds with this quiz. Explore the differences in risk, taxation, and purposes of these key investment instruments.
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