Chapter - 7 Flashcards
Interest accumulated on a bond or debenture since the last interest payment date
accrued interest
A security (usually a bond) which does not have the owner’s name recorded in the books of the issuing company nor on the security itself and which is payable to the holder, i.e., the holder is the deemed owner of the security
bearer bonds
The term applied to retail and institutional investors, since they are the buyers of securities and services provided by the sell-side of the market
buy side
The annual income from an investment expressed as a percentage of the investment’s current value. On stock, calculated by dividing yearly dividend by market price; on bonds, by dividing the coupon by market price.
current yield
In computing the value of a bond, the discount rate is the interest rate used in calculating the present value of future cash flows
discount rate
A measure of bond price volatility. The approximate percentage change in the price or value of a bond or bond portfolio for a 1%-point change in interest rates. The higher the duration of a bond the greater its risk.
duration
A theory stating that the yield curve is shaped by a market consensus about future interest rates
expectations theory
A broker that acts as a financial intermediary between investment dealers to facilitate inter-dealer transactions
inter-dealer broker
A theory that tries to explain the shape of the yield curve. It postulates that investors want to invest for the short- term because they are risk averse. Borrowers, however, want long-term money. In order to entice investors to invest long-term, borrowers must offer higher rates for longer-term money. This being the case, the yield curve should slope upwards reflecting the higher rates for longer borrowing periods.
liquidity preference theory
A theory on the structure of the yield curve. It is believed that large institutions shape the yield curve. The banks prefer to borrow short term while the insurance industry, with a longer horizon, prefers long-term money. The supply and demand of the large institutions shapes the curve.
market segmentation theory
The quoted or stated rate
nominal rate
The current worth of a sum of money that will be received sometime in the future
present value
The coupon payments and principal repayment are adjusted for inflation to provide a fixed real coupon rate
real rate of return
A security recorded on the books of a company in the name of the owner. It can be transferred only when the certificate is endorsed by the registered owner. Registered debt securities may be registered as to principal only or fully registered. In the latter case, interest is paid by cheque rather than by coupons attached to the certificate. Also called ___.
registered security, registered bonds
The risk that interest rates will fall causing the cash flows on an investment, assuming that the cash flows are reinvested, to earn less than the original investment. For example, yield to maturity assumes that all interest payments received can be reinvested at the yield to maturity rate. This is not necessarily true. If interest rates in the market fall the interest would be reinvested at a lower rate. ___ recognizes this risk.
reinvestment risk
