Bond pricing, yield measures, and duration and convexity concepts tested on CFA Level 1.
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- What is par value (or face value) of a bond?
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The amount the bond issuer promises to repay at maturity.- What is a coupon rate on a bond?
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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?
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Semiannual (twice per year).- What does it mean when a bond trades at a discount?
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Its price is below par value.- What does it mean when a bond trades at a premium?
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Its price is above par value.- Define yield to maturity (YTM).
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The discount rate that equates the present value of all future cash flows to the current bond price.- What is current yield?
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Annual coupon payment divided by current bond price.- How does current yield relate to YTM for a bond trading at a discount?
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Current yield is lower than YTM.- How does current yield relate to YTM for a bond trading at a premium?
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Current yield is higher than YTM.- What is a spot rate in the context of fixed income?
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The yield to maturity on a zero-coupon bond of a specific maturity.- Define Macaulay duration.
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The weighted average time to receive a bond's cash flows, where weights are present values of those cash flows.- What is modified duration?
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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?
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They are equal; the duration equals the maturity in years.- What is the relationship between coupon rate and duration?
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Higher coupon rates result in shorter durations.- What is the relationship between yield level and duration?
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Higher yields result in shorter durations.
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