Summary: Finance 4

Read the summary and the most important questions on finance 4

• 6 Bonds and Bond Valuation

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• What is Face Value?

  
  •The principal amount of a bond that is repaid at the end of the term. Also called par value.

• What is the formula for bond value?

  If a bond has:
  1. A face value of F paid at maturity
  2. A coupon of C paid per period
  3. t periods to maturity
  4. A yield of r per period, its value is:

• What are 2 option for a greater interest rate risk?

  1. •All other things being equal, the longer the time to maturity, the greater the interest rate risk
  
  2.   •All other things being equal, the lower the coupon rate, the greater the interest rate risk

• 6.2 Bond Ratings

• What are the key bond ratings?

  
  - Aaa and AAA – highest rating, capacity to pay interest and principal is extremely strong.
  
  - Baa and BBB – adequate capacity to pay interest and repay principal.
  
  - BB, Ba, Ca, CC and C – predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation.
  
  - D – in default and payment of interest and/or payment of principal is in arrears.

• 6.4 Bond Markets

• What are the 3 bond markets?

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• 6.5 Inflation and Interest Rates

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• What is Nominal Rate?

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• What is 'The Fisher Effect'?

  
  The relationship between nominal returns, real returns and inflation
  
  
  Let R stand for the nominal rate and r stand for the real rate:
  1 + R = (1 + r ) x (1 + h)
  
  
  where h is the inflation rate

• What does Structure of interest rates means?

  
  •The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money

• What in Interest Rate Risk Premium?

  
  The compensation investors demand for bearing interest rate risk

• 6.6 Determinants of bond Yields

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• What is a 'TreASURY Yield Curve'?

  
  A plot of the yields on Treasury notes and bonds relative to maturity