Chapter 6: Bonds definitions Flashcards
What are bills or papers
short term bonds with a maturity of less than one year
what are notes
bonds with maturities between one and 7 years
what are bonds
long-term debt instruments that promise fixed payments and have maturities of longer than sever years
what are bullet payment or balloon payment
a principal payment made in one lump sum at maturity
what is a bond indenture
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
what is collateral
assets that can serve as security for the bond in case of default
what is covenant provisions
clauses within the indenture that lay out the legal rights of the bondholder and the obligations of the issuer
what is par value also called
face value, maturity value
what is par value
the amount paid at maturity for traditional bonds
what is term to maturity
time remaining to maturity date
what is interest payments also called
coupons
what are coupons
amounts paid (interest) on a bond at regular intervals
what are mortgage bonds
debt instruments that re secured by real assets
what are debentures
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
what is collateral trust bonds
bonds secured by a pledge of other financial assets such as, bonds, or treasury bills
what is equipment trust certificates
a type of debt instrument secured by equipment, such as railway rolling stock
what are protective covenants
clauses in a trust indenture that restrict the actions of the issuer, covenants can be positive or negative
what are callable bonds
bonds tat give the issuer the option to “call” or repurchase, outstanding bonds at predetermined prices at specified times
what are call prices
prices, generally at a premium over par, at which issuers can repurchase bonds
what are retractable bonds
bonds that the bondholder can sell back to the issuer at predetermined prices at specified times earlier than the maturity date
what are extendible bonds
bonds that allow the bondholder to extend the maturity dates of the bonds
what are sinking fund provisions
the requirement that an issuer set aside funds each year to be used to pay off the debt at maturity
what is purchase fund provisions
the requirement that a certain amount of debt be repurchased only if it can be repurchased at or below a given price
what are convertible bonds
bonds that can be converted into common shares at predetermined conversion prices
what is a discount
the difference between a bond’s par value and the price it trades at when it trades below the par value
what is a premium
the difference between a bond’s par value and the price it trades at when it trades above the par value
what is interest rate risk
the sensitivity of bond prices to changes in interest rates
what is duration
an important measure of interest rate risk that incorporates several factors
what is yield to maturity (YTM)
the discount rate used to evaluate bonds
what is the current yield
the ratio of the annual coupon interest rate divided by the current market price
what is the nominal interest rates
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
what is RF
risk-free rate
what is risk-free rate
the rate of return on risk-free investments, which is often used as the base interest rate
what is default free
having no risk of non-payment
what is interest rate parity (IRP)
a theory that demonstrates how differences in interest rates between countries are offset by expected changes in exchange rates
what is term structure of interest rates
the relationship between interest rates and the term to maturity on underlying debt instruments
what is the yield curve
the graphic representation of the term structure of interest rates, based on debt instruments form the same issuer
what is liquidity preference theory
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
what is expectations theory
a theory that argues that the yield curve reflects investor expectations about the future interest rates
what is market segmentations theory
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
what is spread
difference in yield that compensates the investor for the assumption of additional rsiks
what is default risk
the risk associated with the bond issuer and its ability to pay
what is debt ratings
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
what is investment grade debt
debt obligation with a credit rating of AAA, AA, A or BBB
what is speculative debt
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”
;what is liquid premium
an additional yield offered on bonds that are less liquid
what is issue specific premiums
premiums that arise when bonds have features that cause them to be more or less attractive to investors, relative to straight (option-free) bonds
what is a zero coupon bond
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”
what are floating rate bonds (floaters)
bonds that have adjustable coupons that are usually tied to some variable short-term rate
what are real return bonds
bonds issued by the gov. of Canada that provide investors with protection against inflation
what are Canada savings bonds (CSBs)
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
