FIN 408 Exam 1

current yield

tells investors what they will earn from buying a bond and holding it for a year (pmt/price)


better approximation of anticipated return b/c it equates todays value with the PV of all payments

call feature

PV - original price
FV - call premium
N - callable #
pmt - normal

expectations theory

interest rates of different maturities are perfect substitutes - indifferent b/w buying 10 year bonds or series of 1 yr bonds (same return)

liquidity premium

tries to compensate you for tying up your money for a longer period

if future short term interest rates are low

they're expected to rise - upward yield curve

interest rate risk

bonds with long maturities are risky; bonds with short maturities are not risky (assuming maturity period = holding period)

reinvestment risk

if holding period is longer than maturity period; proceeds that need to be reinvested is uncertain; uncertainty about future interest rates