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FN1 corporate finance > Chapter 6: Bonds definitions > Flashcards

Chapter 6: Bonds definitions Flashcards

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1
Q

What are bills or papers

A

short term bonds with a maturity of less than one year

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2
Q

what are notes

A

bonds with maturities between one and 7 years

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3
Q

what are bonds

A

long-term debt instruments that promise fixed payments and have maturities of longer than sever years

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4
Q

what are bullet payment or balloon payment

A

a principal payment made in one lump sum at maturity

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5
Q

what is a bond indenture

A

a legal document that specifies the payment requirements and all other salient matters relating to a particular bond issue, held and administered by a trust company

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6
Q

what is collateral

A

assets that can serve as security for the bond in case of default

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7
Q

what is covenant provisions

A

clauses within the indenture that lay out the legal rights of the bondholder and the obligations of the issuer

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8
Q

what is par value also called

A

face value, maturity value

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9
Q

what is par value

A

the amount paid at maturity for traditional bonds

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10
Q

what is term to maturity

A

time remaining to maturity date

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11
Q

what is interest payments also called

A

coupons

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12
Q

what are coupons

A

amounts paid (interest) on a bond at regular intervals

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13
Q

what are mortgage bonds

A

debt instruments that re secured by real assets

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14
Q

what are debentures

A

debt instruments that are similar to bonds but are generally unsecured or are secured by a general floating charge over the company’s unencumbered assets

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15
Q

what is collateral trust bonds

A

bonds secured by a pledge of other financial assets such as, bonds, or treasury bills

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16
Q

what is equipment trust certificates

A

a type of debt instrument secured by equipment, such as railway rolling stock

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17
Q

what are protective covenants

A

clauses in a trust indenture that restrict the actions of the issuer, covenants can be positive or negative

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18
Q

what are callable bonds

A

bonds tat give the issuer the option to “call” or repurchase, outstanding bonds at predetermined prices at specified times

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19
Q

what are call prices

A

prices, generally at a premium over par, at which issuers can repurchase bonds

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20
Q

what are retractable bonds

A

bonds that the bondholder can sell back to the issuer at predetermined prices at specified times earlier than the maturity date

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21
Q

what are extendible bonds

A

bonds that allow the bondholder to extend the maturity dates of the bonds

22
Q

what are sinking fund provisions

A

the requirement that an issuer set aside funds each year to be used to pay off the debt at maturity

23
Q

what is purchase fund provisions

A

the requirement that a certain amount of debt be repurchased only if it can be repurchased at or below a given price

24
Q

what are convertible bonds

A

bonds that can be converted into common shares at predetermined conversion prices

25
Q

what is a discount

A

the difference between a bond’s par value and the price it trades at when it trades below the par value

26
Q

what is a premium

A

the difference between a bond’s par value and the price it trades at when it trades above the par value

27
Q

what is interest rate risk

A

the sensitivity of bond prices to changes in interest rates

28
Q

what is duration

A

an important measure of interest rate risk that incorporates several factors

29
Q

what is yield to maturity (YTM)

A

the discount rate used to evaluate bonds

30
Q

what is the current yield

A

the ratio of the annual coupon interest rate divided by the current market price

31
Q

what is the nominal interest rates

A

the rates charged for lending today’s dollar in return for getting dollars back in the future, without taking into account the purchasing power of those future dollars

32
Q

what is RF

A

risk-free rate

33
Q

what is risk-free rate

A

the rate of return on risk-free investments, which is often used as the base interest rate

34
Q

what is default free

A

having no risk of non-payment

35
Q

what is interest rate parity (IRP)

A

a theory that demonstrates how differences in interest rates between countries are offset by expected changes in exchange rates

36
Q

what is term structure of interest rates

A

the relationship between interest rates and the term to maturity on underlying debt instruments

37
Q

what is the yield curve

A

the graphic representation of the term structure of interest rates, based on debt instruments form the same issuer

38
Q

what is liquidity preference theory

A

a theory that suggests that investors prefer short-term debt instruments because they exhibit less interest rate risk, while debt issuers prefer to lock in borrowing rates for longer periods to avoid the risk of having to refinance at higher rates

39
Q

what is expectations theory

A

a theory that argues that the yield curve reflects investor expectations about the future interest rates

40
Q

what is market segmentations theory

A

a theory that suggest that distinct markets (or market segments) exist for interest rate securities of various maturities and that rates are determined within these independent market segments by the forces of supply and demand within the market

41
Q

what is spread

A

difference in yield that compensates the investor for the assumption of additional rsiks

42
Q

what is default risk

A

the risk associated with the bond issuer and its ability to pay

43
Q

what is debt ratings

A

ratings assigned by professional debt-rating services after detailed analyses of bond issuers to determine their ability to sustain the required interest and principal payments

44
Q

what is investment grade debt

A

debt obligation with a credit rating of AAA, AA, A or BBB

45
Q

what is speculative debt

A

debt that is not investment grade, being rated below BBB or Baa; also commonly referred to as “high-yield debt” , “Junk bonds” or “low-grade debt”

46
Q

;what is liquid premium

A

an additional yield offered on bonds that are less liquid

47
Q

what is issue specific premiums

A

premiums that arise when bonds have features that cause them to be more or less attractive to investors, relative to straight (option-free) bonds

48
Q

what is a zero coupon bond

A

a bond that is issued at a discount, pays no coupons, and repays the par value at the maturity date; also commonly referred to as a “ zero”

49
Q

what are floating rate bonds (floaters)

A

bonds that have adjustable coupons that are usually tied to some variable short-term rate

50
Q

what are real return bonds

A

bonds issued by the gov. of Canada that provide investors with protection against inflation

51
Q

what are Canada savings bonds (CSBs)

A

bonds issued by the gov; of Canada that cannot be traded and therefore have no secondary market, which means their prices do not change over time

FN1 corporate finance (44 decks)

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