15 Lecture - Bond valuation & yield on bonds

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15 Lecture

MGT201

Midterm & Final Term Short Notes

Bond valuation & yield on bonds

Bond valuation involves determining the fair price of a bond based on its cash flows, interest rate, and other factors. Yield on bonds, also known as the bond yield or bond yield rate, is the rate of return an investor can expect to receive on a


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  1. What is the formula for calculating the yield to maturity on a bond? A. (Annual coupon payment + Face value - Bond price) / Face value B. (Annual coupon payment / Bond price) x 100 C. (Annual coupon payment + Face value) / Bond price D. (Annual coupon payment x Number of years) / Bond price Answer: A

  2. Which of the following bond yields is used to calculate the price of a bond in the secondary market? A. Yield to maturity B. Current yield C. Coupon rate D. Yield to call Answer: A

  3. What happens to the price of a bond when its yield to maturity increases? A. The price increases B. The price decreases C. The price remains the same D. The price fluctuates Answer: B

  4. What is the relationship between the coupon rate and the yield to maturity on a bond? A. They are equal B. The coupon rate is always higher C. The yield to maturity is always higher D. They may be equal or different depending on market conditions Answer: D

  5. What is the formula for calculating the current yield on a bond? A. Annual coupon payment / Bond price B. (Annual coupon payment x Number of years) / Bond price C. (Annual coupon payment + Face value) / Bond price D. (Annual coupon payment + Face value - Bond price) / Face value Answer: A

  6. Which of the following factors affects the yield to maturity on a bond? A. Coupon rate B. Face value C. Bond price D. All of the above Answer: D

  7. What is the formula for calculating the price of a bond? A. Annual coupon payment x Number of years B. Annual coupon payment / Bond price C. (Annual coupon payment / Yield to maturity) x (1 - 1 / (1 + Yield to maturity)^Number of years) + Face value / (1 + Yield to maturity)^Number of years D. Face value / Bond price Answer: C

  8. Which of the following bonds has the highest default risk? A. Treasury bond B. Municipal bond C. Corporate bond D. Zero-coupon bond Answer: C

  9. What is the yield to call on a bond? A. The yield to maturity when the bond is called B. The yield earned on the bond when it is called C. The yield required by investors to hold the bond until it is called D. None of the above Answer: C

  10. What is the difference between the coupon rate and the yield to maturity on a premium bond? A. The coupon rate is higher than the yield to maturity B. The coupon rate is lower than the yield to maturity C. The coupon rate is equal to the yield to maturity D. It depends on market conditions Answer: B



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  1. Define bond valuation and explain the components of a bond’s price. Answer: Bond valuation refers to the process of determining the fair market value of a bond. The components of a bond’s price include the coupon rate, the face value, the maturity date, and the current market interest rate. The price of a bond is calculated by discounting the future cash flows generated by the bond to the present value using the current market interest rate.

  2. What is the yield to maturity of a bond? Explain its importance in bond valuation. Answer: The yield to maturity of a bond is the rate of return an investor can expect to receive if they hold the bond until maturity. It is important in bond valuation because it is used to determine the fair market value of a bond. The yield to maturity takes into account the current market price of the bond, the face value, the coupon rate, and the number of years to maturity.

  3. What is meant by the term “bond yield”? How is it calculated? Answer: Bond yield refers to the rate of return an investor can expect to receive on a bond. It is calculated by dividing the annual interest payment by the current market price of the bond. The resulting percentage represents the bond yield.

  4. What is the difference between current yield and yield to maturity? Answer: The current yield of a bond is the annual income generated by the bond divided by its current market price. It is a simple calculation that does not take into account the time value of money. The yield to maturity, on the other hand, is the rate of return an investor can expect to receive if they hold the bond until maturity. It takes into account the time value of money and factors in the current market price of the bond, the face value, the coupon rate, and the number of years to maturity.

  5. Explain the concept of interest rate risk in relation to bond valuation. Answer: Interest rate risk refers to the risk that the value of a bond will decrease as a result of a change in the market interest rate. When the market interest rate increases, the value of existing bonds decreases because the coupon rate on those bonds becomes less attractive to investors. This means that bond prices are inversely related to interest rates. As interest rates rise, bond prices fall, and vice versa.

  6. What is a zero-coupon bond? How is it valued? Answer: A zero-coupon bond is a bond that does not pay any interest during its life. Instead, the investor receives the face value of the bond at maturity. Zero-coupon bonds are valued by discounting the face value to the present using the current market interest rate. Since zero-coupon bonds do not pay any interest, their value is highly sensitive to changes in the market interest rate.

  7. How is the yield curve used in bond valuation? Answer: The yield curve is a graphical representation of the relationship between bond yields and their respective maturities. The shape of the yield curve is important in bond valuation because it provides information about the current and future state of the economy. A steep yield curve indicates that investors expect interest rates to rise in the future, while a flat yield curve indicates that interest rates are expected to remain stable.

  8. What is the difference between a callable bond and a putable bond? Answer: A callable bond is a bond that allows the issuer to redeem the bond before its maturity date. This means that the investor’s cash flows can be interrupted if the bond is called. A putable bond, on the other hand, is a bond that allows the investor to redeem the bond before its maturity date. This means that the investor has the right to sell the bond back to the issuer at a predetermined price.

  9. What is the difference between a premium bond and a discount bond? Answer

Bond valuation is the process of determining the fair value of a bond. There are several methods to value a bond, including the present value of future cash flows, the yield-to-maturity, and the bond pricing model. The yield on a bond refers to the return an investor earns on the bond's price. It is expressed as a percentage of the bond's face value. The present value of future cash flows method is the most common approach to bond valuation. It involves discounting the expected cash flows from the bond at a discount rate, which is determined based on the risk associated with the bond. The present value of the cash flows represents the fair value of the bond. The yield-to-maturity (YTM) is the rate of return an investor would earn on a bond if the bond is held until maturity. It takes into account the bond's price, face value, coupon rate, and time to maturity. YTM is a useful measure of a bond's value because it considers all of the bond's future cash flows. The bond pricing model is another method used to value a bond. This model takes into account the bond's coupon rate, face value, time to maturity, and the prevailing interest rates in the market. The model calculates the fair value of the bond based on the interest rate differential between the bond and the market. The yield on a bond is determined by the market demand for the bond. It is influenced by a variety of factors, including prevailing interest rates, inflation expectations, and the creditworthiness of the bond issuer. The yield on a bond can be either higher or lower than the bond's coupon rate, depending on market conditions. Overall, bond valuation and yield analysis are essential tools for bond investors. By understanding how to value a bond and calculate its yield, investors can make informed decisions about buying and selling bonds in different market conditions.

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