Chapter 12 Flashcards
bond indenture
Document accompanying a bond that
spells out the details of the bond issue, such as
covenants and sinking fund provisions. It states
the lender’s rights and privileges and the borrower’s obligations
call provision
A right, usually included in the terms
of a bond, that gives the issuer the ability to
repurchase outstanding bonds before they
mature.
coupon rate
The dollar amount of the yearly coupon
payment expressed as a percentage of the face
value of a coupon bond.
credit default swap (CDS)
A transaction in which one party
who wants to hedge credit risk pays a fixed
payment on a regular basis, in return for a contingent payment that is triggered by a credit
event such as the bankruptcy of a particular firm
or the downgrading of the firm’s credit rating by
a credit rating agency.
current yield
An approximation of the yield
to maturity that equals the yearly coupon
payment divided by the price of a coupon
bond.
discount
When the bond sells for less than the par
value.
financial guarantees
A contract that guarantees that
bond purchasers will be paid both principal and
interest in the event the issuer defaults on the
obligation.
FINRA
general obligation bonds
Bonds that are secured
by the full faith and credit of the issuer,
which includes the taxing authority of
municipalities.
IPO
interest rate risk
The possible reduction in returns
that is associated with changes in interest rates.
junk bonds
premium
amount paid for an option contract
registered bonds
Bonds requiring that their owners register with the company to receive interest payments. Registered bonds have largely
replaced bearer bonds, which did not require
registration.
restrictive covenants
Provisions that specify certain
activities that a borrower can and cannot engage
in.
