Final (Ch. 6)

Question 1

Coupons

Answer 1

• Stated Interest payment made on a bond

Question 2

Face Value (Par Value)

Answer 2

• The principal amount of a bond

Question 3

Coupon Rate

Answer 3

• The annual coupon/the face value

Question 4

Yield to Maturity (YTM)

Answer 4

• The rate required in the market on a bond

Question 5

Interest Rate Risk

Answer 5

1. All other things being equal, the longer the time to maturity, the greater the interest rate risk.
2. All other things being equal, the lower the coupon rate, the greater the interest rate risk.

Question 6

Indenture

Answer 6

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

Question 7

Registered Form

Answer 7

• The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record

Question 8

Bearer Form

Answer 8

• A bond issue w/out record of the owner’s name; payment is made to whomever holds the bond

Question 9

Debenture vs. Note

Answer 9

• Debenture - Unsecured debt, usually with a maturity of 10 years or more
• Note - Unsecured debt, usually with a maturity of under 10 years

Question 10

Sinking Fund

Answer 10

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

Question 11

Call Provision

Answer 11

• Agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity

Question 12

Call Premium

Answer 12

• The amount by which the call price exceeds the par value

Question 13

Deferred Call Provision

Answer 13

• Bond call provision prohibiting the company from redeeming the bond prior to a certain date

Question 14

Call Protected

Answer 14

• Bond during period in which it cannot be redeemed by the issuer

Question 15

Protective covenant

Answer 15

• A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect th elender’s interest

Question 16

Zero Coupon Bonds

Answer 16

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

Question 17

Bid vs. Asked Price

Answer 17

• Bid - The price a dealer is willing to pay for a security

- Asked Price - The price a dealer is willing to take for a security

Question 18

Bid-Ask Spread

Answer 18

• The difference between the bid price and the asked price

Question 19

Clean Price

Answer 19

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

Question 20

Dirty Price

Answer 20

• The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays

Question 21

Real Rates

Answer 21

• Interest Rates or rates of return that have been adjusted for inflation

Question 22

Nominal Rates

Answer 22

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

Question 23

Term Structure of Interest Rates

Answer 23

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

Question 24

Inflation Premium

Answer 24

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

Question 25

Interest Rate Risk Premium

Answer 25

• The compensation investors demand for bearing interest rate risk

Question 26

Treasury Yield Curve

Answer 26

• A plot of the yields on Treasury notes and bonds relative to maturity

Question 27

Default Risk Premium

Answer 27

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

Question 28

Tax-ability Premium

Answer 28

• The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

Question 29

Liquidity Premium

Answer 29

• The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity