{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Notes Midterm 2

Notes Midterm 2 - Notes Midterm 2 Chapter 7 Interest rates...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Notes Midterm 2 2/12/08 Chapter 7 Interest rates increase, present value decreases So, as interest rates increase, bond prices decrease and vice versa Price Risk o Change in price due to changes in interest rates o Long-term bonds have more price risk than short-term bonds o Low coupon rate bonds have more price risk than high coupon rate bonds Reinvestment Rate Risk o Uncertainty concerning rates at which cash flows can be reinvested o Short-term bonds have more reinvestment rate risk than long-term bonds o High coupon rate bonds have more reinvestment rate risk than low coupon rate bonds ARM (Adjustable Rate Mortgage)/3year loan 5% - payments are lower <-there’s reinvestment rate risk because you don’t know how the interests rate will react 30 year fixed 6% <- interest rates don’t affect payments Callable Bond (look up what that means) 85% 10% coupon rate Decrease 5% - refinance When they call this bond, you have to refinance if the interest rate decreases by 5 (lose half of your money) 1-10 years Not Callable 10 – 15 years callable 15-20 years callable, no extra premium Capital 50% Debt Disney issued bonds at a rate of 7% 99 years Registered Bonds – 99% of bonds are registered Gov likes these because they get to collect tax on them Bearer Bonds – tear coupon off, give it to company, and receive cash To avoid taxes on your bonds Whoever owns it gets to retrieve the money Personal Property Real Property – land or anything permanently attached to the land or building, all goes to mortgage holders, easy to college on mortgage, easier to obtain capital
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Junk Bond 1. rated BB or below 2. not rated 3. Income bond (doesn’t have legal obligation to pay back interest) Muni 1. not taxed at the federal level Zero Coupon Bonds no reinvestment rate risk interest rate risk T-Bill (Treasury Bills) 2/14/08 Why do they issue a certain type of bond? What risk did they reduce or remove? Compare and Contrast Interest Risk – first concern of bond holders Credit Risk Callable bond vs non-callable bond Floating Rate Bonds -To get rid of interest risk…issue Floating Rate Bonds -Lower risk for bond holders, but the risk doesn’t go away -ARM (Adjustable Rate Mortgages) -Based on Inflation -Every six months or year, you adjust the rate of the bond (protected against changes in interest rate) -transfer risk to bond holder -the one taking out the bond has the risk Banks issue mortgages -sell mortgages to someone else so they don’t have the risk -if interest rates increase, mortgages decrease Disaster Bonds -pays 10%, 12% -company is rated AAA -bet on weather -0 hurricane = payment, 5 hurricanes = no payment -not correlated to stock market -lower portfolio risk Convertible bond -trade in for shares of stock -paid like a bond at first, when it increases to a certain percentage it will start to act like a stock
Image of page 2
-if stock price goes down, it will behave like a bond again Put Bonds -can take bond back to company and get money back Treasury Quotations Fischer Quotations R = r + h (approximation) (1 + R) = (1+r)(1+h) (real equation)
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern