Chapter 12 - Investing in Bonds Flashcards
Bonds
Long-term debt securities issued by government agencies or corporations that are collateralized by assets
Debentures
long-term debt securities issued by corporations that are secured only by the corporation’s promise to pay (riskier than bonds)
Par value
For a bond, its face value, or the amount returned to the investor at the maturity date when the bond is due
Market price
is expressed as a percentage of the bond’s par value
Term to maturity
The date at which a bond will expire and the par value of the bond, along with any remaining coupon payments, is to be paid back to the bondholder
Call feature
allows the issuer to repurchase the bond from the investor before maturity
sinking fund
a pool of money that is set aside by a corporation or government to repurchase a set amount of bonds in a set period of time
Put feature
allows the investor to redeem the bond at its face value before it matures
Convertible bond
a bond that can be converted into a stated number of shares of the issuer’s stock at a specified pricee
extendible bond
a short-term bond that allows the investor to extend the maturity date of the bond
current yield
the yield derived by dividing the bond’s annual coupon payments by its current market price
yield to maturity
the annualized return on a bond if it is held until maturity
yield to call
yield on a bond if the issue remains outstanding until its call date
Discount bond
a bond that is trading at a price below its part value
premium bond
a bond that is trading at a price above its par value
term structure of interest rates
a graph that shows the relationship between bond yield ot maturity and time to maturity
Liquidity preference theory
investors require a premium for investing in longer-term bonds
Pure expectations theory
the shape of the yield curve is a reflection of the market’s expectation for future interest rate movements.
Market segmentation theory
the shape of the yield curve is determined by the supply and demand of bonds for various market players in different segments of the yield curve.
High-Yield bonds
bonds issued by less stable corporations that are subject to a higher degree of default risk
T-Bills
short-term debt securities issued by the Canadian and provincial governments and sold at a discount
Banker’s acceptances
a short-term debt securities issued by large firms that are guaranteed by a bank
Commercial paper
A short-term debt security issued by large firms that is guaranteed by the issuing firm
Default risk
the risk that the borrower of funds will not repay the creditors
Risk premium
the extra yield required by investors to compensate for default risk; an additional return beyond the risk-free rate you could earn from an investement
Call (prepayment) risk
the risk that a callable bond will be called
inflation risk
the risk that the purchasing power of a bond investment will diminish due to a relative increase in inflation
Reinvestment risk
the risk that the income earned from a bond cannot be reinvested at the same or a higher rate of interest as was being earned from the original bond
Liquidity risk
the risk that a bond will be difficult to sell quickly without cutting the price if the investor wants to sell it.
Interest rate risk
the risk that a bond’s price will decline in response to an increase in interest rates
Interest rate strategy
selecting bonds based on interest rate expectations
passive strategy
investing in a diversified portfolio of bonds that are held for a long period of time
maturity matching strategy
selecting bonds that will generate payments to match future expenses
List the main sources of risk for a bond
*Default risk
*Call (prepayment) risk
*Inflation risk
*Reinvestment risk
*Interest rate risk
What are the different types of Bonds?
*Government of Canada Bonds
*Federal Crown corporation bonds
*Provincial Bonds
*Municipal Bonds
*Corporate Bonds
Strip bonds
long-term debt securities issued by the Government of Canada (and some provinces), that do not offer coupon payments.
