Chapter 6 - interest rates and bond valuation

Question 1

coupon

Answer 1

the stated interest payment made on a bond

Question 2

face value (par value)

Answer 2

the principal amount of a bond that is repaid at the end of the term

Question 3

coupon rate

Answer 3

the annual coupon divided by the face value of a bond

Question 4

maturity

Answer 4

specified date on which the principal amount of a bond is paid

Question 5

current yield

Answer 5

a bond’s coupon payment divided by its closing price

Question 5

yield to maturity (YTM)

Answer 5

the rate required in the market on a bond

Question 6

indenture

Answer 6

the written agreement between the corporation and the lender detailing the rems the debt issue

Question 7

bearer form

Answer 7

a bond issued without record of the owner’s name; payment is made to whomever holds the bond

Question 8

debenture

Answer 8

unsecured debt. usually with a maturity of 10 years or more

Question 8

note

Answer 8

unsecured debt, usually with a maturity of under 10 years

Question 9

seniority

Answer 9

indicates preference in position over other lenders and debts are sometimes labeled as senior or junior

Question 10

sinking fund

Answer 10

an account managed by the bond trustee for early bond redemption

Question 11

call provision

Answer 11

agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity

Question 12

call premium

Answer 12

the amount by which the call price exceeds the par value of the bond

Question 13

deferred call provision

Answer 13

bind call provision prohibiting the company form redeeming the bond prior to a certain date

Question 14

call protected bond

Answer 14

bond during period in which it cannot be redeemed by the issuer

Question 15

protective covenants

Answer 15

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

Question 15

government bonds

Answer 15

are risk free

Question 16

zero coupon bond

Answer 16

a bond that makes no coupon payment, and thus is initially priced at a deep discount

Question 17

Fischer effect

Answer 17

the relationship among nominal returns, real returns, and inflation

Question 18

term structure of interest rates

Answer 18

the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money

Question 19

inflation premium

Answer 19

the portion of a nominal interest rate that represents the compensation for expected future inflation

Question 20

interest rate risk premium

Answer 20

the compensation investors demand for bearing interest rate risk

Question 21

treasury yield curve

Answer 21

a plot of the yield on treasury notes and bonds relative to maturity

Question 22

default rosk premium

Answer 22

the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default

Question 23

taxability premium

Answer 23

the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

Question 24

liquidity premium

Answer 24

the portion of a nominal interest rat for bond yield that represents compensation for lack of liquidity