Question

Define and describe the following:

1. U. S. Treasury Bills

2. Zero-coupon bond

3. Consol

4. Yield to Maturity

5. Capital Gain/Loss

6. Current Yield (be sure to review the Module Notes)

7. Holding Period Return (be sure to review the Module Notes)

8. Investment Horizon

9. Default Risk

10. Inflation Risk

11. Interest Rate Risk

Answer 1

1. US treasury bills are short term money market bills issued by US treasury department to fund government projects. The face value of treasury bills is 1000 and their maturity is less than 1 year.The interest from t -bills are exempt from federal and state taxes. Moreover they are default free as they are backed by the government.

2. Zero Coupon bond are bonds which do not pay any coupons but are sold at discount. The buyers redeems the face value at maturity.They are also termed as accrual bonds and their prices are more sensitive to changes in YTM as compared to a similar coupon paying bond.

3. CONSOL is acronym for consolidated annuities.These are bonds issue by the US government which acts similar to perpetuity. The coupons are paid till perpetuity or if the government decides to redeem the bond. The bank of England also issues the bond.

4. Yield to maturity : It is the total realised return if the bond is held till maturity. YTM is the discount rate used to discount all coupons till the date of maturity and the par value.Higher the YTM lower is the price of bond and lower the YTM higher the price of the bond.

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