Investment in Bonds Flashcards
A certificate of indebtedness with a fixed interest rate and maturity date. It is a formal and unconditional promise to pay a specified sum of money at a determinable future date and to make periodic interest payments at a stated rate until the principal amount is fully paid.
Bond
The face (principal) amount of the bond, which is paid at maturity (also called maturity value or face value).
Par Value
The stated interest rate (generally fixed) paid by the issuer, used as the basis for computing the interest collected by the bondholder (also called the nominal rate).
Coupon Interest Rate
The specific date when the bond must be repaid by the issuer.
Maturity Date
The date when the bond is issued
Issue Date
The rate of return earned on a bond held until maturity (also called the effective rate or market rate). It is used to calculate the actual interest earned by the bondholder.
Yield to Maturity (YTM)
Bonds ssued by a government unit.
Government Bonds:
Bonds issued by a private corporation.
Commercial Bonds
Bonds secured by real property.
Mortgage Bonds
Bonds secured by company equipment.
Equipment Trust Bonds
Bonds secured by securities invested in by the issuing company.
Collateral Trust Bonds
Bonds secured by all free assets of the issuing company, effectively making them unsecured by any specific assets.
Debenture Bonds
A bond in which the entire principal matures at one time.
Straight Bonds
A bond in which the principal matures in installments.
Serial Bonds
A bond which can be exchanged for other securities of the issuing company at the bondholder’s option.
Convertible Bonds
A bond which can be called, redeemed, or retired by the issuing company before the maturity date.
Callable or Redeemable Bonds
A bond which cannot be called or redeemed before maturity.
Non-Cancellable or Non-Redeemable Bonds
A bond which is transferred by mere delivery; bondholders are not registered in the issuer’s books.
Bearer Bonds
A bond in which interest coupons are attached to the bond certificate; interest is paid to the holder of the coupon.
Coupon Bonds
A bond which is registered in the issuer’s books and transferable upon surrender of the bond certificate.
Registered Bonds
A Registered Bond in which interest is paid to any party presenting the interest coupon.
Registered as to Principal Only
A Registered Bond in which interest is paid only to the party registered as the bondholder in the issuer’s books.
Registered as to Both Principal and Interest
A bond in which no periodic interest payments; issued at a discount, and the value increase until maturity serves as the earned interest.
Zero-Coupon Bonds
High-yield bonds issued by companies with low credit ratings, carrying a higher risk of default.
Junk Bonds
Refers to the price investors are willing to pay to realize their desired yield or rate of return from the investment. It is calculated as the total present value (PV) of all future cash flows resulting from the bond investment.
Bond Value
If a bond is purchased at 100% of the face value, the yield (effective rate) is
equal to the nominal rate of interest.
If a bond is purchased below face value, the yield (effective rate) is
higher than the nominal rate of interest.
If a bond is purchased above face value, the yield (effective rate) is
lower than the nominal rate of interest.
