Chapter 6 Flashcards
Coupon
the stated interest payment made on a bond
Face Value
also known as par value, the amount of the bond that is eventually paid back to the bond holder
Coupon Rate
annual coupon divided by the face of the bond
Maturity
the date on which the amount of the bond is fully paid back
Yield to maturity
the rate required in the market on a bond
Interest Rate Risk
when interest rates rise, the present value of future cash flows decrease, which means the value of the bond decreases
Bonds and Yields
as time passes, interest rates change on a bond, which causes the value of a bond to fluctuate
Bond is issued- Registered Form
the registrar of a company records who owns each bond and bond payments are made directly to the owner of records
Bond is issued- Bearer Form
a bond is issued without record of the owner’s name, payment is made to whoever holds the bond
Collateral (type of bond)
some sort of asset is “secured” against the bond, and used as security for payment of a debt
Debenture (type of bond)
unsecured debt, usually with a maturity of 10+ years
Bond Repayment
bonds are normally paid back at some sort of set schedule, whether the payment is made on one lump sum (balloon payment) at the maturity date, or over a fixed period of time
Sinking Fund
an account managed by the trustee for early bond redemption
Call Provisions
allows the company to repurchase or “call” part of all of a bond issue at stated prices over a stated period
Protective Covenant
the part of the indenture (bond contract) limiting certain actions that might be taken during the term of the loan, usually to protect the lender’s interest
Bond Ratings
companies that issue debt pay to have credit ratings assigned to their debt which is primarily done via Moody’s and Standard Poor’s
Government Bonds (type of bond)
are ordinary coupon bonds which pay over a set schedule until maturity
Zero Coupon Bonds
this is a bond that makes no coupon payments over the length of the contract, and is offered initially at a steep discount
Floating Rate Bonds
bonds whose interest rate can fluctuate based upon an underlying index. 2 distinct features:
1) the holder has the right to redeem the note at par on the coupon payment date for a certain amount of time
2) interest rates for these types of bonds normally have a floor and a ceiling
Structured Notes (type of bond)
bonds that are based on stocks, bonds commodities or currencies
Put Bond (type of bond)
allows the holder to force the issuer to buy the bond back at a stated price
Bond Markets
Bonds are traded OTC, dealers all over the world are connected electronically, so buying and selling is very easy to do
TRACE
Trade Reporting and Compliance Engine
Bid Price
the price a dealer is willing to pay for a security
Ask Price
the price a dealer is willing to take for a security
Bid-ask Spread
the price difference between the bid and ask that is equivalent of the dealer’s profit on the transaction
Real Rate
an interest rate that has been adjusted for inflation
Nominal Rate
an interest rate that has not been adjusted for inflation
The Ficher Effect
the relationship among nominal returns, real returns and inflations
1+R=(1+r) x (1+h)
Nominal Rate’s 3 components
1) the real rate of the investment (r)
2) compensation for the decrease in value of the money originally invested because of inflation (h)
3) compensation for the fact that dollars earned on the investment are also worth less because of inflation
