BUSI 2504 Study Guide - Tax Shield, Net Present Value, Financial Instrument

82 views12 pages

Document Summary

Lo1 important bond features and types of bonds. Lo2 bond values and yields and why they fluctuate. Lo5 the impact of inflation on interest rates. Lo6 the term structure of interest rates and the determinants of bond yields. Answers to concepts review and critical thinking questions. 10. (lo2) all else the same, the government security will have lower coupons because of its lower default risk, so it will have greater interest rate risk. (lo4) prices and yields move in opposite directions. Since the bid price must be lower, the bid yield must be higher. (lo1) bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used to establish the coupon rate necessary for a particular issue to initially sell for par value. Bond issuers also simply ask potential purchasers what coupon rate would be necessary to attract them. The coupon rate is fixed and simply determines what the bond"s coupon payments will be.