Exam 3 Study Guide
Chapter 10
1. What is a bond?
A security that obligates the issuer to make specified payments to the holder over a period of time.
2. What is a coupon rate?
A bond's annual interest payment per dollar of par value.
The annual payment equals the coupon rate times the bond's par value. The coupon rate, maturity date, and par value of the bond are part of the bond indenture, which is the contract between the issuer and the bondholder.
3. What is a maturity value (a/k/a par and maturity)
The payment to the bondholder at the maturity of the bond.
4. Can you compute the accrued interest one abond?
For example, if 30 days have passed since the last coupon payment, and there are 182 days in the semiannual coupon period, the seller is entitled to a payment of accrued interest of of the semiannual coupon. The sale, or invoice price of the bond, which is the amount the buyer actually pays, would equal the stated price plus the accrued interest.
(assuming paid semi-annually)
4. What is a catastrophe bond?
The Swiss firm Winterthur once issued a bond whose payments will be cut if a severe hailstorm in Switzerland results in extensive payouts on Winterthur policies. These bonds are a way to transfer “catastrophe risk” from insurance companies to the capital markets. Investors in these bonds receive compensation in the form of higher coupon rates for taking on the risk. But in the event of a catastrophe, the bondholders will lose all or part of their investments.
5. What is the difference between a treasury note and a treasury bond?
Treasury notes are issued with original maturities between 1 and 10 years, while Treasury bonds are issued with maturities ranging from 10 to 30 years. Both bonds and notes may be purchased directly from the Treasury in denominations of only $100, but denominations of $1,000 are far more common. Both make semiannual coupon payments.
6. What is the qualitative difference between a Tbill and a tnote?
Treasury notes are issued in
1. What is a bond?
A security that obligates the issuer to make specified payments to the holder over a period of time.
2. What is a coupon rate?
A bond's annual interest payment per dollar of par value.
The annual payment equals the coupon rate times the bond's par value. The coupon rate, maturity date, and par value of the bond are part of the bond indenture, which is the contract between the issuer and the bondholder.
3. What is a maturity value (a/k/a par and maturity)
The payment to the bondholder at the maturity of the bond.
4. Can you compute the accrued interest one abond?
For example, if 30 days have passed since the last coupon payment, and there are 182 days in the semiannual coupon period, the seller is entitled to a payment of accrued interest of of the semiannual coupon. The sale, or invoice price of the bond, which is the amount the buyer actually pays, would equal the stated price plus the accrued interest.
(assuming paid semi-annually)
4. What is a catastrophe bond?
The Swiss firm Winterthur once issued a bond whose payments will be cut if a severe hailstorm in Switzerland results in extensive payouts on Winterthur policies. These bonds are a way to transfer “catastrophe risk” from insurance companies to the capital markets. Investors in these bonds receive compensation in the form of higher coupon rates for taking on the risk. But in the event of a catastrophe, the bondholders will lose all or part of their investments.
5. What is the difference between a treasury note and a treasury bond?
Treasury notes are issued with original maturities between 1 and 10 years, while Treasury bonds are issued with maturities ranging from 10 to 30 years. Both bonds and notes may be purchased directly from the Treasury in denominations of only $100, but denominations of $1,000 are far more common. Both make semiannual coupon payments.
6. What is the qualitative difference between a Tbill and a tnote?
Treasury notes are issued in