Finance Chapter 7 terms and information from slides

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Author:
ndumas2
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104731
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Finance Chapter 7 terms and information from slides
Updated:
2011-09-27 18:53:57
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LSU Finance
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info from slides and terms
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  1. asked price
    the price a dealer is willing to take for a security
  2. bid-ask spread
    the difference between the bid price and the asked price
  3. clean price
    the price of a bond net of accured interst; this is the price that is typically quoted
  4. dirty price
    the price of a bond including accrued interest, also known as the full or invoice price. this is the price the buyer actually pays
  5. real rates
    interest reates or rates of return that have been adjusted for inflation
  6. nominal rates
    interest rates or reates of return that have not been adjusted for inflation
  7. fisher effect
    the relationship between nominal returns, real returns and inflation
  8. term structure of interest rates
    the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money
  9. inflation premium
    the portion of a nominal interst rate that represents compensation for expected future inflation
  10. interest rate risk premium
    the compensation investors demand for bearing interst rate risk
  11. treasury yield curve
    a plot of the yields on treasury notes and bonds relative to maturity
  12. default risk premium
    the portion of a nominal interst rate or bond yield that represents compensation for the possiblity of default
  13. taxability premium
    the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
  14. liquidity premium
    the portion of a nominal interst rate or bond yield that represents compensation for lack of liquidity
  15. Bond Value = PV of coupons + PV of par
    Bond Value = PV of annuity + PV of lump sum

    This implies that...
    As interest rates increase, present values decrease

    So, as interest rates increase, bond prices decrease and vice versa
  16. If YTM = coupon rate, then par value =
    Bond Price
  17. If YTM > coupon rate, then par value > bond price why?
    Why? The discount provides yield above coupon rate

    –Price below par value, called a discount bond
  18. If YTM < coupon rate, then par value < bond price
    Why?
    • Why? Higher coupon rate causes value above par
    • Price above par value, called a premium bond
  19. Current Yield vs. Yield to Maturity
    • Current Yield = annual coupon / price
    • Yield to maturity = current yield + capital gains yield

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