Bonds Flashcards

1
Q

What is a bond?

A

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.

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2
Q

What is the coupon?

A

The stated interest payment on a bond. Typically paid on an annual or semi-annual basis.

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3
Q

What is the face value?

A

The principal amount of a bond that is repaid at the end of the term. Also called par value or maturity value.

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4
Q

What is the coupon rate?

A

The annual coupon divided by the face value of the bond.

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5
Q

What is meant by maturity?

A

The specified data on which the principal amount of the bond is paid.

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6
Q

What is meant by yield to maturity (YTM)?

A

The total rate of return an investor can expect to earn on a bond if they hold it until maturity.

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7
Q

What is the current yield?

A

Annual coupon / price.

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8
Q

What is the indenture agreement?

A

A written agreement between the corporation and the lender detailing the terms of the debt issue.

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9
Q

What are the 4 different types of bonds?

A

Government
Zero-Coupon
Floating rate (coupon rate linked to current market rates)
Exotics (unusual or exotic features)

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10
Q

What is the clean price?

A

The price of a bond excluding any accrued interest. This is the price that is typically quoted.

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11
Q

What is the dirty price?

A

The price of a bond including accrued interest. This is the price the buyer actually pays.

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12
Q

What is the nominal rate?

A

Rate of return that has not been adjusted for inflation. The percentage change in the amount of cash you have.

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13
Q

What is the real rate?

A

Rate of return that has been adjusted for inflation. The percentage change in your buying power.

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14
Q

What is the Fisher effect?

A

The relationship between nominal returns, real returns, and inflation.

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