FINE 2000 Lecture Notes - Lecture 1: Interest Rate Risk, Accrued Interest, Opportunity Cost

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cerisehorse97

15 Sep 2016

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Interest payment is also called the bond"s coupon. At maturity the debt is repaid when the borrower repays the face value. Accrued interest: coupon interest earned from the last coupon payment to the purchase date of the bond: accrued interest = coupon payment x number of days from last coupon to settlement date/number of days in coupon period. Bond prices are typically quoted without the accrued interest and are known as clean prices. Dirty bond price is including the accrued interest. A bond is valued at the pv of the bond"s cash flows discounted at a rate. The opportunity cost of funds invested in a bond (versus other market securities) is called the interest rate/market interest rate/yield and is used as the discount rate. As the discount rate increase, the bond is worth less. If the discount rate is = to the coupon rate, then the face value and bond value are the same.

Related Questions

4. A Treasury bond has a maturity of Oct 31, 2025. The coupon is 8% paid semi-annually. The yield (YTM) is 6.5%. You purchased the bond with a settlement date of April 20, 2017. The face value is $1,000,000.

a. Calculate the accrued interest.

b. To calculate the dirty price, you need the clean or quoted price. Given the information about the bond, how do you propose to calculate the clean price? [Hint: Consider how you would discount the cash flows.]

jadewasp972

A corporate bond is quoted at 101.67 in the WSJ. The annual coupon rate is quoted as 10% and the bond has 6 years until maturity. Also 50 days have passed since the last payment in the semi-annual coupon period. What is the dirty price for this bond? Assume there are 182 days in the coupon period and a face value of 1,000.

whiteimpala587

QUESTION 1 The largest investors in corporate bonds are life insurance companies and pension funds. True False 5 points QUESTION 2 Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. True False 5 points QUESTION 3 The value (or price) of a bond is the present value of its expected future cash flows. True False 5 points QUESTION 4 Bond prices decline when the interest rate decreases. True False 5 points QUESTION 5 The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000. True False 5 points QUESTION 6 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. True False 5 points QUESTION 7 Zero coupon bonds have no coupon payments so they sell for more than their par value. True False 5 points QUESTION 8 Interest rate risk is the risk that bond prices will fluctuate when the interest rate changes. True False 5 points QUESTION 9 US Treasury securities are considered risky investments because the coupon payments are unpredictable. True False 5 points QUESTION 10 Bonds are very difficult to value because their future cash flows are very difficult to predict. True False 5 points QUESTION 11 If the bond's coupon rate is equal to the market rate then the bond will sell at a price equal to its face value greater than its face value less than its face value equal to its foreign currency value, e.g., its price in British pounds 5 points QUESTION 12 When calculating the price of a bond that pays a semiannual coupon one needs to use double the number of years until maturity for the number of payments use half the annual coupon payment use half the annual rate of return as the discount rate all of the above 5 points QUESTION 13 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments more than the price of the bond equal to zero equal to the price of the bond less than the price of the bond 5 points QUESTION 14 Which one of the following statements is true? All else equal long-term bonds have lower price volatility than short-term bonds. There is an inverse relation between bond prices and market interest rates. All else equal short-term bonds are more risky than long-term bonds. All else equal US government bonds are more risky than corporate bonds. 5 points QUESTION 15 An investor owns a 10-year US government bond with a 9 percent coupon rate. If the yield-to-maturity on the bond is 8 percent then this bond is selling for its par value. a discount. a premium. its face value. 5 points QUESTION 16 BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond? 5 points QUESTION 17 Knight, Inc. has issued a 3-year bond with a $1,000 par value and an annual coupon rate of 6 percent. The current market rate of interest is 5 percent. What is the value of this bond if the coupon payments are made semiannually? 5 points QUESTION 18 Diane Carter is interested in buying a 5-year zero coupon bond with a face value of $5,000. If the market interest rate on these types of bonds is currently 9 percent, what is the current price of this bond? 5 points QUESTION 19 Rudy Sandberg wants to invest in 4-year bonds that are currently priced at $933.76. The bonds have a coupon rate of 6 percent and annual coupon payments. If the par value of the bonds is $1,000, what is the bond's yield-to-maturity? 5 points QUESTION 20 You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years left until maturity?

FINE 2000 Lecture Notes - Lecture 1: Interest Rate Risk, Accrued Interest, Opportunity Cost

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