FNCE chapter 6- Bond valuation Flashcards
debt
a loan to a firm, government, or individual
three debts identifying features
principal amount that must be repaid
interest payments
time to maturity
maturity date
the date on which the principal amount of debt is due
discounted securities
securities selling for less than par value
certificate of deposit
an interest-earning time deposit at a bank or other financial intermediary
money market mutual funds
pools of funds managed by investment companies that are primarily invested in short-term financial assets
bond
a long-term debt instrument
coupon rate
interest paid on a bond or other debt instruments stated as a percentage of its face value
term loan
a loan, on which the borrower agrees to make a series of payments consisting of interest and principal
income bond
a bond that pays interest to the holder only if the interest is earned by the firm
putable bond
a bond that can be redeemed by the bondholders option when certain circumstances exist
floating-rate bond
a bond whose interest rate fluctuates with shifts in the general level of interest rates
zero coupon bond
a bond that pays no annual interest but sells at a discount below par
junk bond
a high risk, high yield bond
indenture
a formal agreement between the issuer of a bond and the bondholders
call provision
a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date
LIBOR
London interbank offer rate
yield to maturity (YTM)
the average rate of return earned on a bond if it is held to maturity
yield to call
the average rate of return earned on a bond if it is held until the first call date
current yield
the interest payment divided by the market price of the bond
capital gains yield
the percentage change in the market price of the bond
the higher the coupon rate
the higher the market price of a bond
when interest rates change
the values of bonds change in an opposite direction
the market value of a bond will always approach its par value when
its maturity date approaches
