Podcast
Questions and Answers
What is the primary difference between obtaining capital through bonds versus a traditional bank loan?
What is the primary difference between obtaining capital through bonds versus a traditional bank loan?
- Bonds typically involve fixed interest rates, whereas bank loans have variable rates.
- Bonds offer the borrower greater flexibility and potentially cheaper borrowing costs. (correct)
- Bonds are only accessible to governments, while bank loans are for corporations.
- Bank loans are tradable on the open market, but bonds are not.
A corporation issues bonds to fund a new expansion project. Which of the following best describes the role of the bondholders in this scenario?
A corporation issues bonds to fund a new expansion project. Which of the following best describes the role of the bondholders in this scenario?
- They become part-owners of the corporation, sharing in its profits and losses.
- They act as guarantors for the corporation's debt, ensuring repayment to other creditors.
- They are essentially lending money to the corporation and expect to be repaid with interest. (correct)
- They manage the expansion project on behalf of the corporation.
If an investor purchases a bond at a price lower than its nominal value, what does this generally indicate about prevailing interest rates?
If an investor purchases a bond at a price lower than its nominal value, what does this generally indicate about prevailing interest rates?
- Prevailing interest rates are lower than the bond's coupon rate.
- The bond issuer is likely to default.
- The bond is close to its maturity date.
- Prevailing interest rates are higher than the bond's coupon rate. (correct)
A bond with a nominal value of $1,000 pays a fixed interest payment (coupon) of $50 every year. If an investor purchases the bond for $900, what is the flat yield?
A bond with a nominal value of $1,000 pays a fixed interest payment (coupon) of $50 every year. If an investor purchases the bond for $900, what is the flat yield?
Which of the following is a key benefit of investing in bonds?
Which of the following is a key benefit of investing in bonds?
What happens on the maturity date (redemption date) of a bond?
What happens on the maturity date (redemption date) of a bond?
A government issues 'gilts.' What is the primary purpose of issuing gilts?
A government issues 'gilts.' What is the primary purpose of issuing gilts?
Which of the following features are inherent characteristics of bonds?
Which of the following features are inherent characteristics of bonds?
An investor wants to calculate the return on their bond investment, but only considers the annual coupon payment relative to the bond's current market price. Which yield calculation are they using?
An investor wants to calculate the return on their bond investment, but only considers the annual coupon payment relative to the bond's current market price. Which yield calculation are they using?
What is a potential disadvantage of investing in bonds?
What is a potential disadvantage of investing in bonds?
Flashcards
What are bonds?
What are bonds?
A form of debt instrument, representing a form of borrowing and are considered fixed income securities with a fixed redemption date.
What are corporate bonds?
What are corporate bonds?
Large companies sell these to aid growth.
What are government bonds?
What are government bonds?
Bonds used by governments when taxes do not cover government spending plans.
What are bond advantages?
What are bond advantages?
Signup and view all the flashcards
What is default risk?
What is default risk?
Signup and view all the flashcards
What are bond yields?
What are bond yields?
Signup and view all the flashcards
What is nominal value?
What is nominal value?
Signup and view all the flashcards
What are coupons?
What are coupons?
Signup and view all the flashcards
What is redemption/maturity?
What is redemption/maturity?
Signup and view all the flashcards
What is bond tradability?
What is bond tradability?
Signup and view all the flashcards
Study Notes
- Bonds serve as an "IOU" or debt instrument.
- Bonds represent borrowing.
- Bonds are fixed income securities with a fixed redemption date.
- Bonds involve borrowers seeking funds from investors instead of banks.
- Bonds offer greater flexibility and cheaper borrowing costs.
- Large, listed companies use bonds, known as corporate bonds, to facilitate growth.
- Governments issue bonds when tax revenues cannot cover their spending plans; UK bonds are known as "Gilts".
- Advantages include predictable income and assessed credit risk.
- A disadvantage to bonds is default risk.
- Bond yields measure the investment return.
- Flat yield is calculated as (Coupons/Bond Price) X100.
- Nominal value is the initial amount paid for the bond.
- Fixed interest or coupons are calculated on the nominal value.
- Coupons are paid to the investor every half year.
- Bonds are tradable and can be bought and sold prior to maturity.
- Bond prices can fluctuate above or below the nominal value.
- Price depends on prevailing interest rates at the time of the trade.
- Bonds feature fixed interest (coupons).
- A set repayment date (redemption/maturity) is a key feature.
- At maturity, the borrower repays the capital to the investor.
- Bond terms typically range from over 1 year to 15 years.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
