Chapter 6 Valuing Bonds

Question 1

BOND

Answer 1

Security that obligates the issuer to make specified payments to the bondholder

Question 2

FACE VALUE

Answer 2

Payment at the maturity of the bond (aka principal/par value)

Question 3

COUPON

Answer 3

Interest payments made to the bondholder

Question 4

COUPON RATE

Answer 4

Annual interest payment as a percentage of face value

Question 5

CURRENT YIELD

Answer 5

Annual coupon payments divided by the bond price

Question 6

YIELD TO MATURITY

Answer 6

Discount rate for which the PV of the bond’s payments equals the price

Question 7

YIELD CURVE

Answer 7

Plot of relationship between bond yields to maturity and time to maturity

Question 8

TERM STRUCTURE OF INTEREST RATES

Answer 8

A listing of bond maturity dates and interest rates that correspond with each date

Question 9

DEFAULT or CREDIT RISK

Answer 9

The risk that a bond issuer may default on its bonds

Question 10

DEFAULT PREMIUM

Answer 10

The additional yield on a bond that investors require for bearing default/credit risk

Question 11

INVESTMENT GRADE

Answer 11

Bonds rated Baa, or above by Mood’ys, or BBB, or above by Standard & Poor’s

Question 12

JUNK BONDS

Answer 12

Bonds with a rating below Baa or BBB

Question 13

ZERO-COUPON BONDS

Answer 13

Bonds that are issued well below face value with no coupon payment

Question 14

FLOATING-RATE BONDS (FLOATER)

Answer 14

Bonds with coupon payments that are tied to some measure of current market rates

Question 15

CONVERTIBLE BONDS

Answer 15

Bonds that allow the holder to exchange the bond at a later date for a specified number of shares of common stock