ECON 333 Study Guide
Money and Banking: Exam Two Study Guide
Bonds
What is a bond?
A promise or an agreement to make payments in the future, they are used by corporations and different branches of the government to borrow money. Bonds are used as a debt instrument
What is a coupon bond? Can you calculate its coupon rate, coupon payment and its price?
A very common bond where one makes annual coupon payments on the percentage of the bond’s face value
A promise from the issuer of the bond, to make a series of periodic interest payments called coupon payments, plus a principal payment at maturity
A debt instrument that requires multiple payments of interest on a regular basis, such as semiannually or annually, and a payment of the face value at maturity
Face Value - the amount to be repaid by the bond issuer (the borrower) at maturity
Maturity - the length of time before the bond expires and the issuer makes the face value payment to the buyer
Coupon Rate
Coupon Payment / Face Value
The coupon rate is the value of the coupon expressed as a percentage of the face value of the bond
Coupon Payment
Coupon Rate x Face Value
The coupon is the annual fixed dollar amount of interest paid by the issuer of the bond to the buyer
Price
Face Value/(1+i)^n + Coupon Payment/(1+i)^n
What is a consol? Can you calculate its price?
A security that makes annual interest payments (at a constant interest) forever
Consol Price
Annual Payment / i
Makes periodic/annual interest payments forever, never repaying the principal that was borrowed
What is a zero-coupon bond?
A bond with a 0% coupon rate
A type of bond that has a 0% coupon rate, therefore there are no coupon payments
Example: Treasury Bills
Be sure that you can calculate yield to maturity, current yield and holding period return
Yield to Maturity
“Interest to maturity”, interest earned if the bond is held until it is mature
Price = Face Value/(1+i)^n + Coupon Payment/(1+i)^n
The interest rate that makes the
Bonds
What is a bond?
A promise or an agreement to make payments in the future, they are used by corporations and different branches of the government to borrow money. Bonds are used as a debt instrument
What is a coupon bond? Can you calculate its coupon rate, coupon payment and its price?
A very common bond where one makes annual coupon payments on the percentage of the bond’s face value
A promise from the issuer of the bond, to make a series of periodic interest payments called coupon payments, plus a principal payment at maturity
A debt instrument that requires multiple payments of interest on a regular basis, such as semiannually or annually, and a payment of the face value at maturity
Face Value - the amount to be repaid by the bond issuer (the borrower) at maturity
Maturity - the length of time before the bond expires and the issuer makes the face value payment to the buyer
Coupon Rate
Coupon Payment / Face Value
The coupon rate is the value of the coupon expressed as a percentage of the face value of the bond
Coupon Payment
Coupon Rate x Face Value
The coupon is the annual fixed dollar amount of interest paid by the issuer of the bond to the buyer
Price
Face Value/(1+i)^n + Coupon Payment/(1+i)^n
What is a consol? Can you calculate its price?
A security that makes annual interest payments (at a constant interest) forever
Consol Price
Annual Payment / i
Makes periodic/annual interest payments forever, never repaying the principal that was borrowed
What is a zero-coupon bond?
A bond with a 0% coupon rate
A type of bond that has a 0% coupon rate, therefore there are no coupon payments
Example: Treasury Bills
Be sure that you can calculate yield to maturity, current yield and holding period return
Yield to Maturity
“Interest to maturity”, interest earned if the bond is held until it is mature
Price = Face Value/(1+i)^n + Coupon Payment/(1+i)^n
The interest rate that makes the