Chapter 7 Interest Rates and Bond Valuatin

Question 1

The principal amount of a bond that is repaid at the end of the term. Also called par value.

Answer 1

Face value

Question 2

The annual coupon divided by the face value of a bond.

Answer 2

Coupon rate

Question 3

The rate required in the market on a bond.

Answer 3

Yield to Maturity

Question 4

A bond’s annual coupon divided by its price.

Answer 4

Current yield

Question 5

The written agreement between the corporation and the lender detailing the terms of the debt issue.

Answer 5

Indenture

Question 6

The form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record.

Answer 6

Registered form

Question 7

The form of bond issue in which the bond is issued without record of the owners name; the payment is made to whomever holds the bond.

Answer 7

Bearer Form

Question 8

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

Answer 8

Debenture

Question 9

An unsecured debt, usually with a maturity under 10 years.

Answer 9

Note

Question 10

An account managed by the bond trustee for early bond redemption.

Answer 10

Sinking fund

Question 11

An agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity.

Answer 11

Call provision

Question 12

The amount by which the call price exceeds the par value of a bond.

Answer 12

Call Premium

Question 13

A call provision prohibiting the company from redeeming a bond prior to a certain date.

Answer 13

Deferred call provision

Question 14

A bond that, during a certain period, cannot be redeemed by issuer.

Answer 14

Call protected bond

Question 15

A part of the indenture limiting certain actions that might be taken during the term of the loan,
Usually to protect the lenders interest.

Answer 15

Protective covenant

Question 16

A bond that makes no coupon payments and is thus initially priced at a deep discount.

Answer 16

Zero coupon bonds

Question 17

The coupon payments are adjustable.

Answer 17

Floating rate bonds

Question 18

Gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price.

Answer 18

Warrant

Question 19

Are similar to conventional bonds, except that coupon payments depend on company income.

Answer 19

Income bond

Question 20

The stated interest payment made on a bond

Answer 20

Coupon

Question 21

Can be swapped for a fixed number of shares of stock anytime before maturity at the holders option.

Answer 21

Convertible bond

Question 22

Allows the holder to force the issuer to buy back the bond at a stated price.

Answer 22

Put bond

Question 23

High coupon rate paid in cash or stock at maturity.

Answer 23

Reverse convertible

Question 24

Bonds based on stocks bonds commodities or currency

Answer 24

Structured notes

Question 25

The price a dealer is willing to pay for a security.

Answer 25

Bid price

Question 26

The price a dealer is willing to take for a security.

Answer 26

Asked price

Question 27

The difference between the bid and asked prices.

Answer 27

Bid-ask spread

Question 28

The price of a bond net of accrued interest; this is the price typically quoted.

Answer 28

Clean price

Question 29

This is the price of a bond including accrued interest; this is the price the buyer actually pays.

Answer 29

Dirty price

Question 30

Interest rates or rates of returns that have been adjusted for inflation.

Answer 30

Real rates

Question 31

Interest rates or rates of return that have not been adjusted for inflation.

Answer 31

Nominal rates

Question 32

The relationship between nominal returns, real returns, and inflation.

Answer 32

Fisher effect

Question 33

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

Answer 33

Term structure of interest rates

Question 34

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

Answer 34

Inflation premium

Question 35

The compensation investors demand for bearing interest rate risk.

Answer 35

Interest rate risk premium

Question 36

A plot of the yields on treasury notes and bonds relative to maturity.

Answer 36

Treasury yield curve

Question 37

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

Answer 37

Default risk premium