Ch 6 - Bonds Flashcards
bond certificate
States the terms of a bond as well as the amounts and dates of all payments to be made.
maturity date
final repayment date of a bond
term
tie remaining until the final repayment date of a bond
face value,par value, principal amount
The notional amount of a bond used to compute its inter- est payments.The face value of the bond is generally due at the bond’s maturity.
coupons
The promised interest payments of a bond,paid periodically until the maturity date of the bond.
coupon rate
Determines the amount of each coupon payment of a bond.The coupon rate, expressed as an APR,is set by the issuer and stated on the bond certificate.
zero-coupon bond
bond that makes only one payment at maturity
treasury bills
Zero- coupon bonds,issued by the U.S.government,with a maturity of up to one year.
discount
price at which bonds trade that is less than their face value
pure discount bonds
zero-coupon bonds
yield to maturity (YTM)
The rate of return of an investment in a bond that is held to its maturity date, or the discount rate that sets the present value of the promised bond payments equal to the current market price for the bond.
spot interest rates
default-free, zero-coupon yields
zero-coupon yield curve
A plot of the yield of risk- free zero-coupon bonds (STRIPS) as a function of the bond’s maturity date
coupon bonds
Bonds that pay regular coupon interest payments up to maturity,when the face value is also paid
treasury notes
A type of U.S.Treasury coupon security,currently traded in financial markets,with original maturities from one to ten years.
Treasury bonds
A type of U.S.Treasury coupon security,currently traded in financial markets,with original maturities of more than ten years.
premium
A price at which coupon bonds trade that is greater than their face value.
par
A price at which coupon bonds trade that is equal to their face value
dirty price or invoice price
A bond’s actual cash price.
clean price
A bond’s cash price less an adjustment for accrued interest, the amount of the next coupon payment that has already accrued.
corporate bonds
Bonds issued by a corporation
credit risk
The risk of default by the issuer of any bond that is not default free; it is an indication that the bond’s cash flows are not known with certainty.
investment-grade bonds
Bonds in the top four categories of credit- worthiness with a low risk of default.
speculative bonds, junk bonds, or high-yield bonds
Bonds in one of the bottom five categories of creditworthiness (below investment grade) that have a high risk of default.
default spread or credit spread
The difference between the risk-free interest rate on U.S. Treasury notes and the interest rates on all other loans.The magnitude of the credit spread will depend on investors’ assessment of the likelihood that a particular firm will default.
