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23 Cards in this Set
- Front
- Back
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What is default premium? |
It is the difference between yield of a corporate bond and government bond, with the same maturity. |
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What is default risk? |
Risk that a company can't make interest payments. |
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What is face value? |
The par value, the amount the issuer owes. |
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What is coupon payment? |
Interest payment the company will make |
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What is the difference between investment grade and junk bond? |
Investment grade has AAA to BBB with low risk of default and low interest. Junk BB to D, Ba to C has relatively high risk of bankruptcy |
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What is the difference between corporate bond and consumer loan? |
One is raised from bank, and one is raised from the public |
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How do you determine discount rate on bond? |
Discounted based on default risk |
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What is a basis point? |
One basis point=.01 percent |
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What is the difference between bank debt and bonds? |
Bank debt is secured by assets of the company Bank debt has floating interest rates Bank debt carry financial maintenance covenants Bank debt is amortized a certain percentage a year Bank debt tends to be pre-payable at any time |
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Why bank debt? |
Bank debt has lower interest because it is collateralize |
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What is YTM? |
The rate of return of a bond held to maturity |
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YTM vs. Yield to worst? |
Yield to worst is the lowest potential yield |
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What is a callable bond? |
A callable bond has prices that are built in that lets the issuer buyback the bond |
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What is a put bond? |
Allows the owner of the bond to force the issuer to buy back the bond |
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What is the convertible bond? |
Can convert from bond into equity |
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Why debt vs equity? |
There's a tax shield, or it can't raise the money from equity |
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How do you determine if a company has credit risk? |
Current ratio Quick ratio Interest coverage Leverage ratio |
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What is floating interest rate? |
Floating interest is seen on bank loans and set at LIBOR. LIBOR+term loan |
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What is PIK interest? |
Paid in Kind interest The face value of the bond will increase instead of the coupon |
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What are covenants? |
Covenants are requirements the company must comply with to avoid defaulting on it |
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What can the Fed do to influence the economy? |
Open market operations (trading government securities and shrinking/expanding the money supply) Raise or lower the interest rate Manipulate the reserve requirement. Low requirements mean more cash can be loaned and expand |
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What is duration? |
How sensitive a bond's price is to changes in the interest rate. Takes the weighted average of the cash flows. |
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What is convexity? |
Measures the relationship between bond prices and yields |
