CHAPTER 7 Interest Rates

What are bonds?

Debt securities issued by corporations or governments for long-term borrowing.

What is a coupon in terms of bonds?

The stated interest payment made on the bond, e.g., $120 annually.

What does face value (par value) refer to in bonds?

The principal amount repaid at the end of the bond's term, e.g., $1,000.

How is the coupon rate calculated?

The annual coupon divided by face value (e.g., $120 ÷ $1,000 = 12%).

What happens to bond value when interest rates rise?

Bond value decreases because the present value of cash flows declines.

What are the key components needed to value a bond?

Number of periods until maturity, face value, annual coupon, yield to maturity (YTM).

What does a discount bond indicate?

A bond sells for less than its face value due to increased interest rates.

What is a premium bond?

A bond that sells for more than its face value when interest rates drop.

How is the total value of a bond calculated?

Total Value = Present Value of Coupons + Present Value of Face Value.

What is current yield?

The ratio of annual coupon to current price of the bond.

What is yield to maturity (YTM)?

The total expected return if the bond is held until maturity.

What expands interest rate risk in bond investment?

A longer time to maturity and lower coupon rates increase risk.

What are zero coupon bonds?

Bonds sold at a discount with no interim cash flows, redeemable only for face value at maturity.

What are sukuk?

Islamic finance compliant bonds structured to avoid interest payments.

How do bond ratings reflect creditworthiness?

High ratings indicate low default risk, ranging from AAA/Aaa to D for default.

What is the general expression for calculating bond value?

Bond Value = Σ(C/(1+r)ⁱ) + (F/(1+r)ᵗ), where C is coupon, F is face value, and r is yield.