Bonds Flashcards
Definition: Bond
A type of debt or long-term promissory note, issued by a borrower, promising to its holder a predetermined and fixed amount of interes per year and repayment of principal at maturity.
Issuers of a Bond (3)
1) Corporations
2) Governments
3) State and Local Municipalities
Types of Bonds (5)
1) Debentures
2) Subordinated Debentures
3) Mortgage Bonds
4) Eurobonds
5) Convertible Bonds
Definition: Debentures
Unsecured long-term debt. They are riskier than secured bonds for borrowers but provide a higher yield than secured bonds. Debentures don’t require the issuing firm to tie up property as collateral.
Definition: Mortgage Bond
A type of bond secured by a lien or real property. Typically the value of the real property is greater than that of the bonds issued.
Definition: Eurobonds
Bonds which are issued in a different country to the currency of the bond. For example a bond issued by an American corporation in Japan paying coupons in Dollars.
Definition: Convertible Bonds
Debt securities that can be converted into a firm’s stock at a pre-specified price after a certain time after issuing the bond.
Definition: Par Value
The value at which a borrower buys the bond. The par value is payed back once the bond matures.
Definition: Coupon Interest Rate
The percentage of the par value that the bond will pay periodically (either anual or more commonly semi-anual)
Definition: Maturity
The length of time until the bond issuer returns the par value to the bondholder. Once a bond has matured it is considered terminated.
Definition: Bond Rating
A bond can be rated between AAA and D. These rating reflect the future risk potential of these bonds.
Definition: Discount Bonds
A type of bond where the market price is lower than the face value as a result of the market interest rate being higher than the coupon interest rate. (km > kc)
Definition: Premium Bonds
A type of bond where the market price is higher than the face value as a result of the market interest rate being lower than the coupon interest rate. (km < kc)
Definition: Bonds at Par
When a bond is at par its face value is the exact same as its market price. This is due to the fact that its coupon interest rate is also the same as the market interest rate. (km = kc)
Definition: Yield to Maturity (Bonds)
The speculative rate of return or interest rate of a fixed-rate security, such as a bond. The YTM is based on the belief or understanding that an investor purchases the security at the current market price and holds it until the security has matured (reached its full value), and that all interest and coupon payments are made in a timely fashion.
