FNAN 405: Ch. 10

Current yield

A bond's annual coupon divided by its market price.

Coupon rate

A bond's annual coupon divided by its par value. Also called coupon yield or nominal yield.

Malkiel's 5 bond price theorems:

1. bond prices and bond yields move in opposite directions; as a bond's yield increases, its price decreases; conversely, as a bond's yield decreases, its price increases 2. for a given change in a bond's YTM, the longer the term to maturity of the bond, the greater the magnitude of change in the bond's price 3. ..., the size of the change in the bond's price increases at a diminishing rate as the bond's term to maturity lengthens 4...., the resulting percentage change in the bond's price is inversely related to the bond's coupon rate 5. For a given absolute change in a bond's YTM, the magnitude of the price increase caused by a decrease in yield is greater than the price decrease caused by an increase in yield

Callable bond

A bond is callable if the issuer can buy it back before it matures.

Straight bond

An IOU that obligates the issuer to pay the bondholder a fixed sum of money at the bonds maturity along with constant, periodic interest payments during the life of the bond.

Discount bond

Bonds with a price < par value; and a coupon rate < current yield < YTM.

Par bond

Bonds with a price = par value; and coupon rate = current yield = YTM.

Premium bond

Bonds with a price > par value; and a coupon rate > current yield > YTM.

A callable bond:

Can be redeemed by the issuer prior to maturity.

A change in a bond's price caused by which one of the following is defined as the dollar value of an 01?

Change in yield to maturity of one basis point

Clean price

Ignores accrued interest; the price of a bond net of accrued interest.

According to Malkiel's theorems, bond prices and bond yields are:

Inversely related

Which one of the following will occur if a bond's discount rate is lowered?

Market price will increase

Yield to call

Measure of return that assumes a bond will be redeemed at the earliest call date.

Yield to maturity

The discount rate that equates a bond's price with the present value of its future cash flows; also called promised yield or just yield.

Call protection period

The period during which a callable bond cannot be called.

Dirty price

The price the buyer actually pays; the price of a bond including accrued interest. -Dirty Price = Clean Price + Accrued Interest

Call price

The price the issuer of a callable bond must pay to buy it back.

A premium bond is defined as a bond that:

has a market price that exceeds par value.