chapt 6 risk,liquidity and bond features Flashcards Preview

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Flashcards in chapt 6 risk,liquidity and bond features Deck (17)
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1
Q

the greater the default risk,

A

the higher the required YTM

2
Q

the less liquid the bond

A

the higher the required YTM

3
Q

call features generally increase

A

the YTM

4
Q

extendable bonds generally

A

have lower required YTMs

5
Q

retractable bonds generally have

A

lower required YTM

6
Q

what are soverign debt ratings

A

see pg 230

7
Q

what are liquidity premiums

A

see pg 232 - 233

8
Q

what are some other types of bonds

A

treasury bills

9
Q

what are treasury bills

A

short-term obligatons of the gov with an intial term to maturity of 1 year or less
- issued at a discount to face value with face value being paid at maturity

10
Q

what is the difference b/w face value - discounted issue price

A

= interst income

11
Q

what are zero coupon bonds

A

does not make regular interest payments

  • issued at a discount
  • repays at maturity, the par value
  • since no coupons are paid, there is no reinvestment rate risk
  • commonly interest and principal are sold separately
12
Q

if market rates fall, price of a zero coupon bond would

A

increase and vice versa

13
Q

zeros are more sensitive to

A

interest rate changes because they don’t make any coupon payments

14
Q

what are floating rate bonds

A

have coupon rates that float with some reference rate, such as yield on T-bills
- since it floats, or is vairavle, the market price will typicall be close to the bond’s face value

15
Q

what are real return bonds

A

isused by the gov. of Canada

  • to protect investors against unexpected inflation
  • each period, the face value is grossed up by the inflation rate
  • coupon is paid on the grossed up face value
16
Q

what are Canada savings bonds

A

issued by gov. of Canada as either
1. regular interest bonds - interst paid annually
or
2. compound interest bonds
- interest compounded over the life of the bond
- no secondary market for Canada savings bonds, they are redeemable at any chartered bank in Canada at face value

17
Q

what is interest rate parity

A

demonstrates why diffences in interest rates b/w counteris should be offset by fowrad exchange rates