Chapter 6: Bonds definitions

Question 1

What are bills or papers

Answer 1

short term bonds with a maturity of less than one year

Question 2

what are notes

Answer 2

bonds with maturities between one and 7 years

Question 3

what are bonds

Answer 3

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

Question 4

what are bullet payment or balloon payment

Answer 4

a principal payment made in one lump sum at maturity

Question 5

what is a bond indenture

Answer 5

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

Question 6

what is collateral

Answer 6

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

Question 7

what is covenant provisions

Answer 7

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

Question 8

what is par value also called

Answer 8

face value, maturity value

Question 9

what is par value

Answer 9

the amount paid at maturity for traditional bonds

Question 10

what is term to maturity

Answer 10

time remaining to maturity date

Question 11

what is interest payments also called

Answer 11

coupons

Question 12

what are coupons

Answer 12

amounts paid (interest) on a bond at regular intervals

Question 13

what are mortgage bonds

Answer 13

debt instruments that re secured by real assets

Question 14

what are debentures

Answer 14

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

Question 15

what is collateral trust bonds

Answer 15

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

Question 16

what is equipment trust certificates

Answer 16

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

Question 17

what are protective covenants

Answer 17

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

Question 18

what are callable bonds

Answer 18

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

Question 19

what are call prices

Answer 19

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

Question 20

what are retractable bonds

Answer 20

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

Question 21

what are extendible bonds

Answer 21

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

Question 22

what are sinking fund provisions

Answer 22

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

Question 23

what is purchase fund provisions

Answer 23

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

Question 24

what are convertible bonds

Answer 24

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

Question 25

what is a discount

Answer 25

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

Question 26

what is a premium

Answer 26

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

Question 27

what is interest rate risk

Answer 27

the sensitivity of bond prices to changes in interest rates

Question 28

what is duration

Answer 28

an important measure of interest rate risk that incorporates several factors

Question 29

what is yield to maturity (YTM)

Answer 29

the discount rate used to evaluate bonds

Question 30

what is the current yield

Answer 30

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

Question 31

what is the nominal interest rates

Answer 31

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

Question 32

what is RF

Answer 32

risk-free rate

Question 33

what is risk-free rate

Answer 33

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

Question 34

what is default free

Answer 34

having no risk of non-payment

Question 35

what is interest rate parity (IRP)

Answer 35

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

Question 36

what is term structure of interest rates

Answer 36

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

Question 37

what is the yield curve

Answer 37

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

Question 38

what is liquidity preference theory

Answer 38

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

Question 39

what is expectations theory

Answer 39

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

Question 40

what is market segmentations theory

Answer 40

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

Question 41

what is spread

Answer 41

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

Question 42

what is default risk

Answer 42

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

Question 43

what is debt ratings

Answer 43

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

Question 44

what is investment grade debt

Answer 44

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

Question 45

what is speculative debt

Answer 45

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"

Question 46

;what is liquid premium

Answer 46

an additional yield offered on bonds that are less liquid

Question 47

what is issue specific premiums

Answer 47

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

Question 48

what is a zero coupon bond

Answer 48

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"

Question 49

what are floating rate bonds (floaters)

Answer 49

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

Question 50

what are real return bonds

Answer 50

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

Question 51

what are Canada savings bonds (CSBs)

Answer 51

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