Question

1. A(n) bond is a long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holder of bond. There are four main types reflecting who the issuers are: ?-Select-1.Business2.Treasury?corporate, municipal, and foreign. Each type differs with respect to degree of risk and expected return. All have some common characteristics even though they may have different contractual features.

2. The par value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid. A call provision gives the issuing corporation the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have sinking fund call provisions which require the corporation to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being safer so they will have (-Select-1.lower2.equivalent )coupon rates than otherwise similar bonds without these provisions.

3. Longer maturity bonds have high-interest rate risk but low reinvestment rate risk, while higher coupon bonds have a higher level of (-Select-1.reinvestment rate 2.exchange rate)risk and a lower level of (-Select-1.interest rate2.exchange rate) risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called duration which is the bond's sensitivity to interest rates.

Answer 1

1. A(n) bond is a long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holder of bond. There are four main types reflecting who the issuers are: Treasury, corporate, municipal, and foreign. Each type differs with respect to degree of risk and expected return. All have some common characteristics even though they may have different contractual features. {There can be 4 types of issuers in bond market - federal government, corporate entities, state municipal bodies and foreign issuers. Bonds issued by the federal government are also referred to as Treasury}

2. The par value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid. A call provision gives the issuing corporation the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have sinking fund call provisions which require the corporation to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being safer so they will have lower coupon rates than otherwise similar bonds without these provisions. {Sinking fund reduced the risk of default. By basic financial concept, lower risk means lower retuns - this implies lower coupon in case of bonds}

3. Longer maturity bonds have high-interest rate risk but low reinvestment rate risk, while higher coupon bonds have a higher level of reinvestment rate risk and a lower level of interest rate risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called duration which is the bond's sensitivity to interest rates.{Reinvestment risk is the risk of re-investing the intermittent payments received at a lower interest rate than that of initial investment. High coupon means high amount to be reinvested at a lower rate which implies higher reinvestment risk. However, higher coupons reduce the interest rate risk associated with the bond. This is because bonds with higher coupons have lower durations}