Chapter 3 Flashcards
Cash flows
different streams of cash payments
Coupon bond
pays the owner of the bond a fixed interest payment (coupon
payment) every year until the maturity date, when a specified final amount
(face value or par value) is repaid.
Coupon rate
the dollar amount of the
yearly coupon payment expressed as a percentage of the face value of the
bond.
Current yield
an approximation to describe interest
rates (yields to maturity) on long-term bonds.
Discount bond
is bought at a price
below its face value (at a discount), and the face value is repaid at the maturity date. Unlike a coupon bond, a discount bond does not make any interest
payments; it just pays off the face value.
Duration
the average lifetime of a
debt security’s stream of payments.
Face value
a specified final amount of a bond being repaid
fixed payment loan
lender provides the borrower with an amount of funds, which must be repaid
by making the same payment every period (such as a month), consisting of
part of the principal and interest for a set number of years.
Indexed bonds
bonds whose interest and principal
payments are adjusted for changes in the price level
Interest rate risk
?
Nominal interest rate
the interest rate whom makes
no allowance for inflation
Perpetuity
a perpetual bond with no maturity date and no repayment of principal that makes
fixed coupon payments of $C forever.
Present value
t a dollar of cash flow paid to you one year from now is less
valuable to you than a dollar paid to you today. What a future cash payment is worth today
Rate of capital gain
the change in the bond’s price
relative to the initial purchase price
Real interest rate
interest rate with inflation accounted for
