Bond pricing, yield measures, and duration and convexity concepts tested on CFA Level 1.
40 cards · basic cards · AI-written, checked twice. Edit anything.
- What is par value (or face value) of a bond?
- The amount the bond issuer promises to repay at maturity.
- What is a coupon rate on a bond?
- The fixed annual interest rate applied to the par value, paid to the bondholder.
- What is the coupon payment frequency that most US corporate bonds use?
- Semiannual (twice per year).
- What does it mean when a bond trades at a discount?
- Its price is below par value.
- What does it mean when a bond trades at a premium?
- Its price is above par value.
- Define yield to maturity (YTM).
- The discount rate that equates the present value of all future cash flows to the current bond price.
- What is current yield?
- Annual coupon payment divided by current bond price.
- How does current yield relate to YTM for a bond trading at a discount?
- Current yield is lower than YTM.
- How does current yield relate to YTM for a bond trading at a premium?
- Current yield is higher than YTM.
- What is a spot rate in the context of fixed income?
- The yield to maturity on a zero-coupon bond of a specific maturity.
- Define Macaulay duration.
- The weighted average time to receive a bond's cash flows, where weights are present values of those cash flows.
- What is modified duration?
- Macaulay duration divided by (1 plus yield per period); it approximates the percentage price change for a 100 basis point change in yield.
- How does a zero-coupon bond's duration relate to its maturity?
- They are equal; the duration equals the maturity in years.
- What is the relationship between coupon rate and duration?
- Higher coupon rates result in shorter durations.
- What is the relationship between yield level and duration?
- Higher yields result in shorter durations.