Bonds Flashcards
What is a bond?
A type of loan. When a company wishes to borrow money from the public on a long-term basis, it does so by selling (issuing) debt securities called bonds.
What is the coupon?
The stated interest payment on a bond. Typically paid on an annual or semi-annual basis.
What is the face value?
The principal amount of a bond that is repaid at the end of the term. Also called par value or maturity value.
What is the coupon rate?
The annual coupon divided by the face value of the bond.
What is meant by maturity?
The date when a bond’s principal is repaid to the investor, and interest payments cease
What is meant by yield to maturity (YTM)?
The total rate of return an investor can expect to earn on a bond if they hold it until maturity.
What is the current yield?
Annual coupon / price.
What is the indenture agreement?
A written agreement between the corporation and the lender detailing the terms of the debt issue.
What are the 4 different types of bonds?
Government
Zero-Coupon
Floating rate (coupon rate linked to current market rates)
Exotics (unusual or exotic features)
What is the clean price?
The price of a bond excluding any accrued interest. This is the price that is typically quoted.
What is the dirty price?
The price of a bond including accrued interest. This is the price the buyer actually pays.
What is the nominal rate?
The interest rate that the issuer of a bond agrees to pay to the bondholder each year. It is the stated interest rate on a bond, without adjusting for inflation or other factors.
What is the real rate?
The interest rate an investor receives after adjusting for inflation. It’s calculated by subtracting the inflation rate from the bond’s nominal interest rate.
What is the Fisher effect?
The relationship between nominal returns, real returns, and inflation.
