A: Face value, also known as par value, is equal to a bond's price when it is first issued, but thereafter the price of the bond fluctuates in the market in accordance with changes in interest rates while the face value remains fixed.The various terms surrounding bond prices and yields can be confusing to the average investor. A bond represents a loan made by investors to the entity issuing th...
A: A bond's coupon rate is simply the rate of interest it pays each year, expressed as a percentage of the bond's par value. The par value is the bond's face value, or the amount the issuing entity must pay the bondholder once the bond matures. Most bonds have a clearly stated coupon rate percentage. However, calculating the coupon rate using Microsoft Excel is simple if all you have i...
A: Rating the creditworthiness of a bond issuer, despite the number crunching, is as much an art form as it is a science. While companies like Moody's and A.M. Best gather and analyze mountains of data, the rating itself comes down to the informed opinion of an analyst or a rating committee.Not unlike your individual credit score, the organizations that rate bonds look at an issuer's asset...
A: All bonds have a coupon interest rate, sometimes referred to as a coupon rate (or simply a coupon), that denotes the fixed annual interest paid by the issuer to the bondholder. Coupon interest rates are determined as a percentage of the bond's par value, also known as face value, but differ from interest rates on other financial products because it is the dollar amount, not t...
A: Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy but believes that it can once again become successful if it is given an opportunity to reorganize its assets, debts and business affairs. Although the chapter 11 reorganization process is complex and expensive, most companies, if given the choice, prefer chapter 11 to other bankruptcy prov...
A: The modified duration is an adjusted version of the Macaulay duration and takes into account how interest rate fluctuations affect a bond's durations. Use Microsoft Excel to calculate a bond's modified duration given these parameters: settlement date, maturity date, coupon rate, yield to maturity and frequency.The modified duration determines the change in the value of a fixed income se...
A: Interest rate swaps are, at their core, a derivative instrument built on the premise of comparative advantage. To see how interest rate swaps benefit both parties, understand gains from trade in a macro setting and then apply those lessons to micro swap transactions.There are other possible advantages – information asymmetries might exist in capital markets, or the two parties may simply have...
A: Conventional convertible bonds give the bondholder the right to exchange the bond for a certain amount of the issuer's common shares, regardless of the current market price of those shares. The bondholder will see a large payoff in situations where the total value of the underlying common shares appreciate far beyond the value of the bond. For example, ABC Corp.'s convertible bond is wo...
A: Bond prices fluctuate with changing market sentiments and economic environments, but bond prices are affected in a much different way than stocks. Risks such as rising interest rates and economic stimulus policies have an effect on both stocks and bonds, but each reacts in an opposite way.Stocks versus BondsWhen stocks are on the rise, investors generally move out of bonds and flock t...
A: The Washington Public Power Supply System (WPPSS) was formed in the 1950s to make certain that the Pacific Northwest had a constant source of electrical power. The Packwood Lake Dam was the first project undertaken by the WPPSS, and ran seven months past the expected completion date. This first project by WPPSS foreshadowed its future incompetence in public works.The idea to use clean, che...
A: "Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. A typical short-term investment opportunity that often attracts "hot money" is the certificate of deposit (CD).How Does the 'Hot Money' Concept Work?Banks usually attract "...
A: A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates. A bond's coupon rate is expressed as a percentage of its par value. The par value is simply the face value of the bond, or the value of the bond as stated by the issuing entity. Thus, a $1,000 bond with a coupon rate of 6% pays $60 in interest annually.Coupon rates are larg...
A: Treasury bills (T-Bills), notes and bonds are marketable securities that the U.S. government sells in order to pay off maturing debt and to raise the cash needed to run the federal government. When you buy one of these securities, you are lending your money to the government of the U.S.Understanding T-billsT-bills are short-term obligations issued with a term of one year or less, and becau...
A: R-squared is a statistical analysis of the practical use and trustworthiness of beta (and by extension alpha) correlations of securities. Whereas correlation measures the link between any two securities, R-squared measures one security against a set benchmark or index, such as comparing a bond to an aggregate bond index versus comparing it to the Standard & Poor's 500.The former example...
A: A bond's coupon rate is equal to its yield to maturity if its purchase price is equal to its par value. The par value of a bond is its face value, or the stated value of the bond at the time of issuance, as determined by the issuing entity. Most bonds have par values of $100 or $1,000.Read more What is the difference between yield to maturity and the coupon rate?The par value of a bond does...
