HW4_Answers - Answers to End-of-Chapter Questions Q4-2...

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Answers to End-of-Chapter Questions Q4-2. Define the following terms commonly used in bond valuation: (a) par value , (b) maturity date , (c) coupon , (d) coupon rate , (e) coupon yield , (f) yield to maturity ( YTM ), and (g) yield curve . A4-2 . The par value is the face value of principal amount that a bond repays when it matures. It is usually $1,000 for corporate bonds. The maturity date indicates when a bond’s final payment is due, and it signals the end of the bond’s life. The coupon is the dollar amount of interest that a bond pays over a year. The coupon rate equals the coupon divided by the par value. The coupon yield equals the coupon dividend by the market price of the bond. The YTM is the discount rate that equates the present value of a bond’s cash flows to its current market price, and it is a measure of the return that investors require on a particular bond. The yield curve is a graph showing how interest rates vary with maturity for a group of bonds having equal risk. Q4-4. What is the difference between a pure discount bond and a bond that trades at a discount?
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