Bond Pricing Flashcard

Front

Which of the following best describes yield to maturity (YTM) on a bond? Options: The coupon rate the bond pays annually., The current market price of the bond compared to its face value., The total return an investor can expect if the bond is held until it matures, assuming all payments are made as scheduled., The interest rate set by the Federal Reserve that influences bond yields.

Back

The total return an investor can expect if the bond is held until it matures, assuming all payments are made as scheduled.

Front

What is the most important characteristic to consider when choosing a strong bond comparable?

Back

Credit Rating

Front

What rate is used to discount future cash flows to calculate bond price?

Back

Yield to Maturity

Front

Why do bond prices fall when market interest rates rise?

Back

The bond’s fixed payments become less attractive compared to new bonds.

Front

Suppose a bond has a coupon rate of 5%. Market interest rates fall to 3%. What is most likely to happen to the bond’s price in the secondary market?

Back

The bond’s price will rise above par and trade at a premium.

Front

Which of the following best describes a discount bond?

Back

A bond sold below its par value because its coupon rate is lower than current market rates.

Front

A bond has a face value of $1,000 and a coupon rate of 3%. New bonds in the market are paying 6%. How will this bond most likely trade?

Back

At a discount, below $1,000.

Front

Where would you expect a new 10yr bond to price for Company C, given that Company A (Rated AA) issued a 5yr bond at Treasuries + 100bp and a 30yr bond at Treasuries + 120bp, and Company B (Rated BBB) issued a 10yr bond at Treasuries + 160bp and a 30yr bond at Treasuries + 180bp?

Back

T+135bp

Front

Starbucks (SBUX) has an A– credit rating and is issuing a 7-year bond. Which of the following is the best comparable bond? McDonald’s 10-year bond, rated BBB+, Nike 7-year bond, rated A–, PepsiCo 5-year bond, rated A, Chipotle 7-year bond, rated BB+

Back

Nike 7-year bond, rated A–