Finance Midterm 2 TSARSIS

What is a bond?

A bond is a fixed-income security that represents a loan made by an investor to a borrower, typically a corporation or government.

What are the different types of bonds?

Corporate bonds, municipal bonds, treasury bonds, zero-coupon bonds, convertible bonds, and Treasury Inflation-Protected Securities (TIPS).These bonds vary in their issuer, structure, and taxation. Each type serves different investment needs and risk profiles.

What is the coupon rate?

The annual interest payment a bondholder receives, expressed as a percentage of the bond's face value.It determines the bond's yield and income generation.

What is yield to maturity (YTM)? Why is it preferred?

YTM is the total return expected on a bond if held to maturity. It is preferred because it accounts for the time value of money.

How do you calculate bond value?

Bond value = Present value of future coupon payments + Present value of the face value.

What is a zero-coupon bond?

A bond that does not pay periodic interest but is sold at a deep discount and pays its face value at maturity.

What is a TIP bond?

Treasury Inflation-Protected Securities (TIPS) are U.S. government bonds designed to protect against inflation.

What is the yield curve and why is it important?

A graph showing the relationship between bond yields and different maturities. It helps predict economic conditions.The yield curve is crucial for investors as it indicates future interest rates and economic activity.

What is interest rate risk?

The risk that bond prices will fluctuate due to changes in interest rates.Interest rate risk refers to the potential for investment losses caused by a rise in interest rates, which inversely affects bond prices.

What is holding period return (HPR)?

(Ending Value - Beginning Value + Income) / Beginning Value The holding period return (HPR) measures the total return on an investment over a specific period, accounting for price changes and income generated, such as dividends or interest payments.

How do you calculate expected return?

Σ (Probability of outcome × Return of outcome) The expected return is the weighted average of all possible returns on an investment, taking into account the likelihood of each return occurring.

What is systematic risk?

Market risk that cannot be eliminated through diversification. Systematic risk, also known as undiversifiable risk, encompasses the potential for widespread losses across the entire market due to economic factors, geopolitical events, or changes in interest rates, affecting all securities.

What is CAPM and how is it calculated?

CAPM (Capital Asset Pricing Model) estimates the expected return of an asset: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate) CAPM provides a framework for evaluating the risk-reward trade-off of a specific investment compared to the risk of the overall market.

What is beta, and why is it important?

Beta measures a stock's volatility relative to the market. A beta >1 means more volatile than the market, while beta <1 means less volatile.

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coefficient of variation

Statistical measure of the dispersion of data points in a data series around the mean

Beta

measure of volatility or systamatic risk of a security comoared to tge market as a whole, used in capital asset pricing model