FIN 2400 Chapter 6 - Key Concepts and Skills (Objectives)
LO1
LO2
LO3
LO4
LO5
Identify important bond features and types of bonds.
Describe bond values and why they fluctuate.
Discuss bond ratings and what they mean.
Evaluate the impact of inflation on interest rates.
Explain the term structure of interest rates and the determinants of bond yields.
Bonds
Bond Basics
 Bonds are simply long-term _______ that represent claims against a firm’s assets.
 Bonds are a form of _____ for a company
 Bonds are often referred to as fixed-_________________ securities.
Bond Specifics
 ________ instrument issued by a corp. or government
 ________________– face value or principal value of the bond – assume $1,000
 ____________ rate = the interest rate paid to investors during the life of the bond and is set when the
issuer first sells the securities into the market.
 Usually has a specific ____________ date
 Yield to maturity - ___________________ earned on a bond held until maturity.
Interest rate risk is the concern that interest rates will _________.
 _______-term bonds have more price risk than ______-term bonds
Bond Valuation
Compute the value for a 6.375% IBM Bond that has 5 years until maturity given that you require an 8%
return on your investment. Payments = ________ Value at maturity = __________ Value today ______
Compute the value of a 9% coupon with semi-annual payments and a 10% (nominal) required rate of
return?
5 years until maturity _____________
Yield to Maturity
If YTM > coupon then bond sells at a ___________ If YTM < coupon then bond sells at a ___________
(below 1,000)
(above 1,000)
What is the YTM of a bond with price of $900, 6.375% coupon and 5 years until maturity?_________
Types of Bonds
 Vanilla – coupon payments are ___________ and original principal paid at ___________
 Zero Coupon – pays no explicit interest but instead, sell at a deep ______________
 Convertible – can be converted into ___________ at a predetermined ratio.
 Junk bonds - _________ investment grade
 Government - ___________ less than 1 year, __________ 1 and 10 years, __________ > 10 years
Tax Consequences
What is the after tax return on a taxable 6% yielding bond if an investor is in the 40% tax bracket?
___________________
Bond Rating Companies
 ________________ ________________ ________________
Bond prices are affected by:
 _______________
Normal Yield Curve
________________
Term Structure – the relationship between ______________ and _________________.
Default risk – risk that investors will receive _________ than the promised returns.