Bond Ratings
A measure of the default risk associated with a company's debt; normally denoted by a series of letters.
What is a bond rating?
A residential mortgage that does not meet the key standards of creditworthiness that apply to a conventional prime mortgage.
What is subprime?
When a bond-rating agency lowers the rating of a company, signaling that its bonds have an increased risk of default.
What is a ratings downgrade?
The relationship among bonds with the same risk characteristics but different maturities.
What is the term structure of interest rates?
The designation for the highest rated bonds for both Moody's and Standard and Poor's.
What is AAA?
Typically a loan is subprime if it is made to someone with a low credit score or whose income is low relative to the price of the home; or if a ratio known as the LTV is high. Give the full name of LTV ratio.
What is loan-to-value ratio?
Short-term primvately issued zero-coupon debt that is low risk and very liquid and usually has a maturity of less than 270 days.
What is commercial paper?
The proposition that long-term interest rates are the average of expected future short-term interest rates.
What is the expectations hypothesis of the term structure.
Bond with low default risk; Moody's rating of Baa or higher; and Standard & Poor's rating of BBB or higher.
What is an investment-grade bond?
Paying off a current mortgage with a new lower-rate mortgage.
What is refinancing?
The yield over and above that on a low-risk bond such as a U.S. Treasury with the same time to maturity, it is a measure of the compensation investors require for the risk they are bearing.
What is a risk spread?
A plot showing the yields to maturity of different bonds of the same riskiness against the time to maturity.
What is a yield curve?
A bond with a high risk of default. Also called a high-yield bond.
What is a junk bond?
This belief about house prices during the early 2000s, based on evidence since the 1930s, encouraged lending to borrowers with progressively lower ability to pay.
What is rising house prices would persist indefinitely?
Bonds issued by state and local governments to finance public projects; the coupon payments are exempt from federal and state income taxes.
What are municipal bonds?
The proposition that long-term interest rates equal the average of expected short-term rates plus a risk premium that rises with the time to maturity.
What is the liquidity premium theory of the term structure?
A low-grade bond that was initially a high-grade bond but whose issuer fell on hard times.
What is a fallen angel?
What is the financial crises of 2007-2009?
According to the expectations hypothesis of the term structure, if the one year treasury rate (i1t) is 4% and the two year treasury rate (i2t) is 3.5%, then the one-year interest rate one year ahead (ie1t+1) takes this value.
What is 3%?
Name 2 of the 3 statistical properties listed in the book for the term structure of Treasury yields.
1. Interest rates of different maturities tend to move together.
2. Yields on short-term bonds are more volatile that yields on long-term bonds.
3. Long-term yields tend to be higher than short-term yields.