Term
| What 3 factors changes bonds interest rates? |
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Definition
Default risk
Liquidity
Tax considerations |
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Term
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Definition
| probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value |
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Term
| Why are US bonds credit risk free? |
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Definition
| Because they can raise taxes whenever they want |
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Term
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Definition
| the spread (difference in yield) between the interest rate on a bond with default risk (and liquidity risk) and the interest rate on a (same maturity) on-the-run Treasury security (the benchmark). |
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Term
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Definition
| If the bond is not held at maturity and rates rise, it can only be sold for a loss |
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Term
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Definition
| If rates decrease then coupon payments can only be reinvested at lower yield. |
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Term
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Definition
| When savers decide to decrease their holding of risky assets and increase their holding of low-risk assets |
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Term
| What happened when the US began to invest in the emerging markets? |
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Definition
| Demand increased and prices rose so interest rates fell |
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Term
| What are the dimensions of liquidity risk? |
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Definition
Length of time to convert asset into money
Transaction cost involved
Certainty of price realized |
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Term
| How does one measure liquidity? |
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Definition
Bid-ask spread
Size of bond issue
On-The-Run vs. Off-The-Run securities |
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Term
| What happens if there is bad news about liquidity? (tax on financial transactions) |
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Definition
| liquidity risk will go up |
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Term
| What does the risk structure of interest rates summarize? |
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Definition
| effects of differences in default risk, liquidity, and taxation on yields for a given maturity. |
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Term
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Definition
| A single statistic summarizing the rating company’s view of the issuer’s likely ability to meet its debt obligations |
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Term
| What are the only types of tax free bonds? |
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Definition
| Municipal bonds (city, state) |
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Term
| Why do saver often prefer capital gains to interest payments? |
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Definition
| because capital gains are only taxed when they are realized, which lowers the present value of the tax. |
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Term
| What do increases in risk premiums often lead to? |
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Definition
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