Ch 6 - Bonds

Question 1

bond certificate

Answer 1

States the terms of a bond as well as the amounts and dates of all payments to be made.

Question 2

maturity date

Answer 2

final repayment date of a bond

Question 3

term

Answer 3

tie remaining until the final repayment date of a bond

Question 4

face value,par value, principal amount

Answer 4

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.

Question 5

coupons

Answer 5

The promised interest payments of a bond,paid periodically until the maturity date of the bond.

Question 6

coupon rate

Answer 6

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.

Question 7

zero-coupon bond

Answer 7

bond that makes only one payment at maturity

Question 8

treasury bills

Answer 8

Zero- coupon bonds,issued by the U.S.government,with a maturity of up to one year.

Question 9

discount

Answer 9

price at which bonds trade that is less than their face value

Question 10

pure discount bonds

Answer 10

zero-coupon bonds

Question 11

yield to maturity (YTM)

Answer 11

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.

Question 12

spot interest rates

Answer 12

default-free, zero-coupon yields

Question 13

zero-coupon yield curve

Answer 13

A plot of the yield of risk- free zero-coupon bonds (STRIPS) as a function of the bond’s maturity date

Question 14

coupon bonds

Answer 14

Bonds that pay regular coupon interest payments up to maturity,when the face value is also paid

Question 15

treasury notes

Answer 15

A type of U.S.Treasury coupon security,currently traded in financial markets,with original maturities from one to ten years.

Question 16

Treasury bonds

Answer 16

A type of U.S.Treasury coupon security,currently traded in financial markets,with original maturities of more than ten years.

Question 17

premium

Answer 17

A price at which coupon bonds trade that is greater than their face value.

Question 18

par

Answer 18

A price at which coupon bonds trade that is equal to their face value

Question 19

dirty price or invoice price

Answer 19

A bond’s actual cash price.

Question 20

clean price

Answer 20

A bond’s cash price less an adjustment for accrued interest, the amount of the next coupon payment that has already accrued.

Question 21

corporate bonds

Answer 21

Bonds issued by a corporation

Question 22

credit risk

Answer 22

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.

Question 23

investment-grade bonds

Answer 23

Bonds in the top four categories of credit- worthiness with a low risk of default.

Question 24

speculative bonds, junk bonds, or high-yield bonds

Answer 24

Bonds in one of the bottom five categories of creditworthiness (below investment grade) that have a high risk of default.

Question 25

default spread or credit spread

Answer 25

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.