CHapter 7 Flashcards

1
Q

the stated interest payment made on a bond

A

coupon

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2
Q

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

A

face value / par value
(assume $1000 unless specifically told otherwise)

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3
Q

the annual coupon divided by the face value of a bond

A

coupon rate

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4
Q

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

A

maturity

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5
Q

are debt securities
- we will use this tem generically to refer to long term debt

A

bonds

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6
Q

the coupon is a

A

dollar amount

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7
Q

the coupon rate is

A

annual

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8
Q

are effectively interest only loans

A

bonds
(no principal repayment is made until redemption)

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9
Q

the rate required in the market on a bond

A

yield to maturity (YTM)

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10
Q

when the bond price is less than the face value / par value

A

discount bond

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11
Q

YTM > coupon rate

A

discount bond

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12
Q

when the bond price is more than the face value / par value

A

premium bond

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13
Q

YTM < coupon rate

A

Premium bond

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14
Q

bond value =

A

bond value =
present value of the coupons + present value of the face amount

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15
Q

bond prices and interest rates have an _____ relationship

A

inverse

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16
Q

if the yield to maturity on a bond increases, then the price of the bond will

17
Q

if th yield to maturity on a bond decreases, then the price of the bond will

18
Q

if YTM > coupon rate then bond price is __ par value

A

bond price < par value
(discount bond)

19
Q

if YTM < coupon rate then the bond price is __ par value

A

bond price > par value
(premium bond)

20
Q

the risk that arises for bond owners from fluctuating interest rates

A

interest rate risk / maturity risk

21
Q

the longer the time to maturity the _____ the interest rate risk

A

the greater

22
Q

the lower the coupon rate the _____ the interest risk

23
Q

a bonds annual coupon divided by its price

A

current yield

24
Q
  • only considers the coupon portion of your return
  • does not factor in time
A

current yield

25
current yield > coupon rate
discount bond
26
current yield < coupon rate
premium bond
27
securities issued by corporation may be classified as
equity securities and debt securities
28
- debt is not an ownership interest in the firm - the corporations payment of interst on debt is considered a cost of doing business and is tax deductible (dividends paid to stockholders are not tax deductible) - unpaid debt is a liability of the firm (if not paid the creditors can legally claim the assets of the firm) (can result in liquidation or reorganization, two of the possible consequences of bankruptcy)
the main differences between debt and equity
29
debt securities with maturities of one year or less
short term debt
30
refers to debt securities with maturities of more than one year
long term debt
31
2 major forms of long term debt
1. public issue 2. privately placed