Chapter 6 - interest rates and bond valuation Flashcards
coupon
the stated interest payment made on a bond
face value (par value)
the principal amount of a bond that is repaid at the end of the term
coupon rate
the annual coupon divided by the face value of a bond
maturity
specified date on which the principal amount of a bond is paid
current yield
a bond’s coupon payment divided by its closing price
yield to maturity (YTM)
the rate required in the market on a bond
indenture
the written agreement between the corporation and the lender detailing the rems the debt issue
bearer form
a bond issued without record of the owner’s name; payment is made to whomever holds the bond
debenture
unsecured debt. usually with a maturity of 10 years or more
note
unsecured debt, usually with a maturity of under 10 years
seniority
indicates preference in position over other lenders and debts are sometimes labeled as senior or junior
sinking fund
an account managed by the bond trustee for early bond redemption
call provision
agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity
call premium
the amount by which the call price exceeds the par value of the bond
deferred call provision
bind call provision prohibiting the company form redeeming the bond prior to a certain date
call protected bond
bond during period in which it cannot be redeemed by the issuer
protective covenants
a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender’s interest
government bonds
are risk free
zero coupon bond
a bond that makes no coupon payment, and thus is initially priced at a deep discount
Fischer effect
the relationship among nominal returns, real returns, and inflation
term structure of interest rates
the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money
inflation premium
the portion of a nominal interest rate that represents the compensation for expected future inflation
interest rate risk premium
the compensation investors demand for bearing interest rate risk
treasury yield curve
a plot of the yield on treasury notes and bonds relative to maturity
default rosk premium
the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
taxability premium
the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
liquidity premium
the portion of a nominal interest rat for bond yield that represents compensation for lack of liquidity
