Investments Final Exam| Terms elaborations plus Questions
and Answers
Who dominates the primary bond market in the US? ** Answ** Institutional Investors
Bond ** Answ** Security that obligates issuer to make payments to holder over time
Face Value / Par Value ** Answ** Payment to bondholder at maturity of bond
Coupon Rate ** Answ** Bond's annual interest payment per dollar of par value
Primary source of bond market risk ** Answ** Interest rate fluctuations
Yield to Maturity ** Answ** Discount rate that makes present value of bond's
payments equal to price
Current Yield ** Answ** Annual coupon divided by bond price
Premium Bonds ** Answ** Bonds Selling above par value
Coupon rate > Current yield > YTM
Discount Bonds ** Answ** Bonds selling below par value
Coupon rate < Current Yield < YTM
Yield to Call ** Answ** the total return that the bond offers if purchased at the
current price and held until the bond is called
Horizon analysis ** Answ** Analysis of bond returns over multiyear horizon, based
on forecasts of bond's yield to maturity and investment options
Realized compound return ** Answ** Compound rate of return on bond with all
coupons reinvested until maturity
Reinvestment rate risk ** Answ** Uncertainty surrounding cumulative future value of
reinvested coupon payments
On the run treasuries ** Answ** The most recently issued U.S. Treasury bond or
note of a particular maturity. "On-the-run" Treasuries are the opposite of "off-the-run"
Treasuries, which refer to Treasury securities that have been issued before the most
recent issue and are still outstanding. Media mentions about Treasury yields and prices
generally reference "on-the-run" Treasuries. I: The on-the-run bond or note is the most
frequently traded Treasury security of its maturity. Because on-the-run issues are the
most liquid, they typically trade at a slight premium and therefore yield a little less than
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, their off-the-run counterparts. Some traders successfully exploit this price differential
through an arbitrage strategy that involves selling (or going short) on-the-run Treasuries
and buying off-the-run Treasuries.
Accrued Interest ** Answ** Interest that has been earned since the last coupon
payment
Full Price ** Answ** Full Price (Dirty) = Flat Price (Clean) + Accrued Interest.
Clean Price ** Answ** The security's price minus the accrued interest
Dirty Price ** Answ** The full price of a bond that includes the accrued interest that
the seller is entitled to receive
Corporate Bonds ** Answ** -finance capital expenditures
-facilitate expansion through mergers or acquisitions
-fund share buyback programs
-general corporate purposes
Whispers ** Answ** Initial Price Targets quoted in credit spread
Book Building ** Answ** -much faster than an IPO in the equity market
-IG firms are usually announced the same day the book closes
Bullet Bonds ** Answ** Bonds that are non-callable for the issue's life
Callable Bonds ** Answ** Bonds that may be repurchased by issuer at specified call
price during call period
Convertible Bonds ** Answ** Allow bondholder to exchange bond for specified
number of common stock shares
Puttable Bonds ** Answ** Holder may choose to exchange for par value or to
extend for given number of years
Floating-rate Bonds ** Answ** Coupon rates periodically reset according to specified
market date
Ginnie Mae ** Answ** Government National Mortgage Association; pools mortgages
for investors
Fannie Mae ** Answ** The government-sponsored enterprise responsible for
guaranteeing and funding home mortgages
Freddie Mac ** Answ** A government supervised enterprise established to purchase
primarily conventional mortgage loans in the secondary mortgage market.
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and Answers
Who dominates the primary bond market in the US? ** Answ** Institutional Investors
Bond ** Answ** Security that obligates issuer to make payments to holder over time
Face Value / Par Value ** Answ** Payment to bondholder at maturity of bond
Coupon Rate ** Answ** Bond's annual interest payment per dollar of par value
Primary source of bond market risk ** Answ** Interest rate fluctuations
Yield to Maturity ** Answ** Discount rate that makes present value of bond's
payments equal to price
Current Yield ** Answ** Annual coupon divided by bond price
Premium Bonds ** Answ** Bonds Selling above par value
Coupon rate > Current yield > YTM
Discount Bonds ** Answ** Bonds selling below par value
Coupon rate < Current Yield < YTM
Yield to Call ** Answ** the total return that the bond offers if purchased at the
current price and held until the bond is called
Horizon analysis ** Answ** Analysis of bond returns over multiyear horizon, based
on forecasts of bond's yield to maturity and investment options
Realized compound return ** Answ** Compound rate of return on bond with all
coupons reinvested until maturity
Reinvestment rate risk ** Answ** Uncertainty surrounding cumulative future value of
reinvested coupon payments
On the run treasuries ** Answ** The most recently issued U.S. Treasury bond or
note of a particular maturity. "On-the-run" Treasuries are the opposite of "off-the-run"
Treasuries, which refer to Treasury securities that have been issued before the most
recent issue and are still outstanding. Media mentions about Treasury yields and prices
generally reference "on-the-run" Treasuries. I: The on-the-run bond or note is the most
frequently traded Treasury security of its maturity. Because on-the-run issues are the
most liquid, they typically trade at a slight premium and therefore yield a little less than
For assistance with assignments contact
, their off-the-run counterparts. Some traders successfully exploit this price differential
through an arbitrage strategy that involves selling (or going short) on-the-run Treasuries
and buying off-the-run Treasuries.
Accrued Interest ** Answ** Interest that has been earned since the last coupon
payment
Full Price ** Answ** Full Price (Dirty) = Flat Price (Clean) + Accrued Interest.
Clean Price ** Answ** The security's price minus the accrued interest
Dirty Price ** Answ** The full price of a bond that includes the accrued interest that
the seller is entitled to receive
Corporate Bonds ** Answ** -finance capital expenditures
-facilitate expansion through mergers or acquisitions
-fund share buyback programs
-general corporate purposes
Whispers ** Answ** Initial Price Targets quoted in credit spread
Book Building ** Answ** -much faster than an IPO in the equity market
-IG firms are usually announced the same day the book closes
Bullet Bonds ** Answ** Bonds that are non-callable for the issue's life
Callable Bonds ** Answ** Bonds that may be repurchased by issuer at specified call
price during call period
Convertible Bonds ** Answ** Allow bondholder to exchange bond for specified
number of common stock shares
Puttable Bonds ** Answ** Holder may choose to exchange for par value or to
extend for given number of years
Floating-rate Bonds ** Answ** Coupon rates periodically reset according to specified
market date
Ginnie Mae ** Answ** Government National Mortgage Association; pools mortgages
for investors
Fannie Mae ** Answ** The government-sponsored enterprise responsible for
guaranteeing and funding home mortgages
Freddie Mac ** Answ** A government supervised enterprise established to purchase
primarily conventional mortgage loans in the secondary mortgage market.
For assistance with assignments contact
