Unit 2: Debt Flashcards
Par value
principal or face value (assumed to be $1,000)
Term bond
entire principal is paid at maturity
Serial bond
principal is paid back in portions before maturity
Balloon bond
part of principal is paid before maturity, remainder of principal is paid at maturity
Bond yield
> a bond’s earnings generated over a particular period of time
annual interest relative to bond’s overall value
Nominal/coupon yield
= annual interest / face value of bond (stated coupon rate)
Current yield (CY)
= annual coupon payment / market price of bond
Yield to maturity (YTM, “basis of”)
> annualized return of bond if held to maturity
lower if bond was purchased at premium
higher if bond was purchased at discount
Yield to call (YTC)
> annualized return of bond if redeemed before maturity
lower if bond was purchased at premium
higher if bond was purchased at discount
Call feature
> issuer is able to call in a bond before maturity
>exercised when interest rates are falling, issuer will want to issue new bond with lower interest
Put feature
> investor is able to put bond back to issuer before maturity
>exercised when interest rates are rising, investor will want to purchase a new bond with higher interest
Convertible feature
investor is able to convert bond into shares of common stock
Zero-coupon bonds
> debt instrument that does not pay interest
sold at discount, investor will profit when bond matures and they collect par value
investor charged phantom income tax for theoretical interest earned at maturity
Mortgage bond
> bond backed by real estate owned by corp.
>secured debt
Equipment trust certificate
> bond backed by capital equipment owned by corp.
>secured debt