Ch. 8

Interest Rate risk:

Risk arising from changes in interest rates

Features of a bond: 3) coupon Rate -

The annual coupon/the face value

As interest rates increase, the present value of future interest payments _______________

decrease

the principal amount to be repaid at the end of the loan is...

Correct! Face Value

Features of a bond: 4) maturity-

The date on which the principal of a bond is paid

The current yield:

A bond's annual coupon/current price.

Features of a bond: 5) yield to maturity-

The interest rate required in the market on a bond

The longer the maturity on a bond, the higher the interest rate risk. T or F?

True

Corporation or government wants money and borrows from the public for a long-term time frame. Known as "issuing" debt securities...known as _________

bonds

2) The lower the coupon rate, ...

the higher the interest rate risk, ceteris paribus -if 2 bonds had same maturity and different coupons, the one with the lower coupon is proportionately more dependent on face value at maturity

1) The longer the maturity, ...

the higher the interest rate risk, ceteris paribus -the longer time in the future, the more chance of interest rate movements

As interest rates increase...

the present value of future interest payments decline and thus, the bond value declines.

As interest rates Decrease...

the present value of future interest payments increases, and thus, the bond value increases.

Features of a bond: 2) face Value/par Value -

the principal amount to be repaid at the end of the loan

Features of a bond: 1) coupon-

the stated interest payment

More bond features:

-Not ownership in a firm -Debt is a liability, creditors can legally claim assets of a firm for unpaid debt -Dealer markets -Almost all occurs in OTC markets...i.e. no centralized reporting of transactions -Go to http://finra-markets.morningstar.com/BondCenter/Default.jsp Search CISCO, have a look at their corporate bond list, click on the 2039 maturity bond

Bond ratings:

Assessment of the creditworthiness of a firm, how likely they are to default and how much protection do creditors have. Two main tiers: - investment Grade (AAA-BBB)and - speculative (or junk) Grade (BB and below)