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Intro To Finance > Ch 6 > Flashcards

Ch 6 Flashcards

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0
Q

Face value AKA par value

A

Principal amount of bond that is repaid at end

Of term

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1
Q

Coupon

A

Stated interest payment made on bond

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2
Q

Coupon rate

A

Annual coupon divided by face value of bond

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3
Q

Maturity

A

Date on which principal amount of bond is paid

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4
Q

Yield to maturity (YTM)

A

Rate required in the market on bond

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5
Q

What happens to the present value of a bond when interest rates rise? When they fall?

A

The present value of the bonds cash flows decline

And the bond is worth less

Vice versa when interest rates fall

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6
Q

a bond that has a yield to maturity of 8% and has 10 years to maturity. What’s the present value of $1,000 paid in 10 years?
Present value of the annuity stream?
Total bond value?

A

Present value = $1,000/(1.08^10) = $1,000/2.1589 = $463.19

Annuity present value = $80 x (1 - 1/1.08^10)/.08 = 536.81

Total bond value = $463.19 + $536.81= $1,000
Note bond sells for exactly it’s face value

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7
Q

Discount bond

A

Bond selling for less than face value

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8
Q

Bond Value Equation, (numbers and verbal)

A

Bond value = C x [1- 1/(1 + r)^t]/r + F/(1 + r)^t
Bond value = present value. +. Present value of the
Of the coupons. Face amount

Ex. Bond value = $80 x (1 - 1/1.1^6)/.1 + $1000/1.1^6

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9
Q

2 main factors that determine interest rate risk?

A

1 the longer time to maturity
means more interest rate risk

2 the lower the coupon rate
means More interest rate risk

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10
Q

Current yield, ex

A

Bonds annual coupon divided by its price

Ex 80/955.14 = 8.38 percent

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11
Q

Finding the yield on a bond?

A

Given bond value, coupon, time to maturity and face value
Only possible to find through trial and error from equation
Below:

Bond value = C x [1- 1/(1 + r)^t]/r + F/(1 + r)^t

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12
Q

Indenture

A

Written agreement btw the corporation and lender

Detailing the terms of the debt issue

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13
Q

6 provisions of an indenture?

A 
1 basic terms of the bond
2 total amount of bonds issued
3 description of property used as security
4 repayment arrangements 
5 the call provisions
6 details of protective covenants
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14
Q

Registered form

A

Form of bond issue which the register of the company
Records ownership of each bond

Payment is made directly to owner of record

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15
Q

Bearer form

A

Form of bond issue where the bond is issued without
Record of owner’s name;

Payment is made to whomever holds the bond

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16
Q

Debenture

A

Unsecured debt, usually with maturity of 10 years or more

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17
Q

Note

A

Unsecured debt, usually with maturity of under 10 years

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18
Q

Seniority

A

Indicates preference in position over other lenders,

Debts are labeled as senior or junior

19
Q

Sinking fund

A

Account managed by the bond trustee for early

Bond redemption

20
Q

Call provision

A

Agreement giving the corporation the option to

repurchase the bond at specific price prior to maturity

21
Q

Call premium

A

Amount by which the call price exceeds the par value of

The bond

22
Q

Deferred call provision

A

Call provision prohibiting the company from redeeming

The bond prior to a certain date

23
Q

Call protected bond

A

Bond that currently can’t be redeemed by issuer

24
Q

Protective covenant, negative, positive?

A

Part of the indenture limiting certain actions that might
Be taken during the term of the loan, usually to protect
the lender

Negative = limitations
Positive = requirements
25
Q

Zero coupon bond

A

Bond that makes no coupon payments and is

Initially priced at a deep discount

26
Q

floating rate bond?

A

Bonds where coupon rates are adjustable

Tied to 30-yr treasury bill index

27
Q

Structured notes

A

Bonds that are based on stocks, bonds, commodities

Or currencies

28
Q

Convertible bond

A

Can be swapped for fixed number of stock shares

29
Q

Put bond

A

Allows holder to force issuer to buy bond back at

stated price

30
Q

Bid price

A

Price dealer is willing to pay for a security

31
Q

Asked price

A

Price dealer is willing to take for a security

32
Q

Bid-ask spread

A

Difference between the bid price and the asked price

33
Q

Clean price

A

Price of bond net of accrued interest

Price typically quoted

34
Q

Dirty price AKA Invoice price

A

Price of bond including accrued interest

Price buyer actually pays

35
Q

Real rates

A

Interest rates or rates of return that have been adjusted

for inflation

36
Q

Nominal rates

A

Interest rates or rates of return that have not been adjusted
for inflation

37
Q

Fisher effect, define, equation?

A

Relationship between nominal returns, real returns
And inflation

1 + R = (1 + r) x (1 + h)

Where R = nominal rate of return
r = real rate of return
h = inflation rate

38
Q

If investors require a 10 percent real rate of return and the inflation rate is 8 percent, what must the approximate nominal rate be?
The exact nominal rate?

A

Approx: 10% + 8% = 18%

Exact: 1 + R = (1 + r) x (1 + h)
1.1. x. 1.08. = 1.188 or 18.8%

39
Q

Term structure of interest rates AKA pure time value of money

A

Relationship between nominal interest rates on default-

Free, pure discount securities and time to maturity

40
Q

Inflation premium

A

Portion of nominal interest Rae that represents

Compensation for expected future inflation rate

41
Q

Interest rate risk premium

A

Compensation investors demand for bearing interest rate risk

42
Q

Treasury yield curve

A

Plot of the yields on treasury notes and bonds

Relative to maturity

43
Q

Default risk premium

A

Portion of a nominal rate or bond yield that represents

Compensation for the possibility of default

44
Q

Tax ability premium

A

Portion of a nominal interest rate or bond yield that

Represents compensation for unfavorable tax status

45
Q

Liquidity premium

A

Portion of a nominal interest rate or bond yield that

Represents compensation for lack of liquidity

46
Q

6 main effects on a bond yield?

A 
1 real rate of interest
Premiums:
2 expected future inflation
3 interest rate risk
4 default risk
5 tax ability
6 lack of liquidity

Intro To Finance (12 decks)

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