FINA 475- Final Exam Guide - Comprehensive Notes for the exam ( 65 pages long!)
1 Dec 2017
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Week 1 page 1 b. c. d. e. f. g. Risk associated with investing in bonds: interest rate risk a. b. If rate is higher, incur a loss because it sells for less than purchase price: reinvestment risk, rate at which cash flows can be reinvested will fall b. Call risk: risk that callable bond is called when interest rate falls. Credit risk: default risk that issuer will fail to satisfy obligation: payment of interest and principal, credit spread: part of risk premium (default risk, credit spread risk: price will decline due to increase in credit spread, inflation risk. To price a bond, need an estimate of: expected cash flows, appropriate required yield, required yield reflects yield for financial instruments with comparable risk. Cash flows for a bond that issuer can"t retire prior to stated maturity date consist of: periodic coupon interest payments to maturity date, par value at maturity.
