CHapter 7 Flashcards
the stated interest payment made on a bond
coupon
the principal amount of a bond that is repaid at the end of the term
face value / par value
(assume $1000 unless specifically told otherwise)
the annual coupon divided by the face value of a bond
coupon rate
the specified date on which the principal amount of a bond is paid
maturity
are debt securities
- we will use this tem generically to refer to long term debt
bonds
the coupon is a
dollar amount
the coupon rate is
annual
are effectively interest only loans
bonds
(no principal repayment is made until redemption)
the rate required in the market on a bond
yield to maturity (YTM)
when the bond price is less than the face value / par value
discount bond
YTM > coupon rate
discount bond
when the bond price is more than the face value / par value
premium bond
YTM < coupon rate
Premium bond
bond value =
bond value =
present value of the coupons + present value of the face amount
bond prices and interest rates have an _____ relationship
inverse
if the yield to maturity on a bond increases, then the price of the bond will
decrease
if th yield to maturity on a bond decreases, then the price of the bond will
increase
if YTM > coupon rate then bond price is __ par value
bond price < par value
(discount bond)
if YTM < coupon rate then the bond price is __ par value
bond price > par value
(premium bond)
the risk that arises for bond owners from fluctuating interest rates
interest rate risk / maturity risk
the longer the time to maturity the _____ the interest rate risk
the greater
the lower the coupon rate the _____ the interest risk
greater
a bonds annual coupon divided by its price
current yield
- only considers the coupon portion of your return
- does not factor in time
current yield
current yield > coupon rate
discount bond
current yield < coupon rate
premium bond
securities issued by corporation may be classified as
equity securities and debt securities
- 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
debt securities with maturities of one year or less
short term debt
refers to debt securities with maturities of more than one year
long term debt
2 major forms of long term debt
- public issue
- privately placed
