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23 Cards in this Set
- Front
- Back
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Bond
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- security that obligates the issuer to make specified payments to the bondholder
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Face value
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- payment at the maturity of the bond, also called principal or par value
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Coupon
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- the interest payments paid to the bondholder
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Coupon rate
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- annual interest payment as a percentage of face value
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Interest rate risk
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- the risk in bond prices due to fluctuations in interest rates
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Current yield
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- annual coupon payments divided by bond price
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Yield to maturity
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- interest rate for which the present value of the bonds payments equals the price
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Rate of return
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- total income per period per dollar invested
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Yield curve
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- plot of relationship between yields to maturity and time to maturity
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Default (or credit) risk
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- the risk that a bond issuer may default on its bonds
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Default premium
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- the additional yield on a bond that investors require for bearing credit risk
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Investment grade
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- bonds rated Baa or above Moody’s or BBB or above by Standard & Poor’s
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Junk bond
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- Bond with a rating below Baa or BBB
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If interest rate is lower than coupon rate
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the bond price is higher than its face value and present value payments
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rate of return =
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coupon rate
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If the bond's yield to maturity remains unchanged during the period,
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the bond price changes with time so that the total return on the bond is equal to the yield to maturity.
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On graph, lower yields=
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the curve slopes downward
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The greater the chance the company will get into trouble,
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the higher the default premium demanded by investors
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Corporate bonds offer higher yields than
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US Treasuries
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Investors also prefer liquid bonds because
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they can easily buy and sell them
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Zero coupon bonds
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investors receive $1000 face value at the maturity date but do not receive a regular coupon payment
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Floating-Rate bonds
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make coupons that are tied to some measure of current market rates
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Convertible bonds
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can choose later to exchange it for a special number of shares of common stock
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