FINN 3222 Investments - Bond Prices and Yields

These flashcards cover essential concepts related to bonds, their pricing, yields, and relevant financial theories, as taught in FINN 3222 Investments.

What do bonds represent in finance?

Bonds represent debt owed by the issuer to the investor.

What is the primary obligation of the issuer when issuing bonds?

The issuer is obligated to pay interest periodically and the par value at maturity.

What is a bond indenture?

A legal contract that specifies the rights and obligations of the issuer and bondholders.

What is credit risk in relation to bonds?

Credit risk is the risk that the bond will not make all promised payments.

What does a higher bond rating indicate?

A higher bond rating indicates lower credit risk.

What are Treasury Bills (T-Bills)?

Short-term debt obligations issued by the U.S. government to cover budget deficits.

What are STRIPS in the context of treasury securities?

STRIPS are treasury securities where the periodic interest payment is separated from the final principal payment.

What are two types of municipal bonds?

General Obligation (GO) Bonds and Revenue Bonds.

What characterizes a callable bond?

Callable bonds may be repurchased by the issuer at a specified call price during the call period.

What is Yield-to-Maturity (YTM)?

YTM is the discount rate that sets the present value of promised bond payments equal to the current market price.

What happens to bond prices when interest rates increase?

When interest rates increase, bond prices decrease.

What is the difference between clean price and full price of a bond?

Clean price does not include accrued interest, while full price includes accrued interest.

What does the Unbiased Expectations Theory (UET) suggest about the yield curve?

UET suggests that the yield curve reflects market's expectations of future short-term rates.

What is the Liquidity Preference Theory (LPT)?

LPT states that investors will hold long-term maturities only if offered a premium due to increased risk.

What is a forward rate in finance?

A forward rate is an expected or 'implied' rate on a short-term security that will originate at a future date.