Financial Mgmt Chapter 4

Front 1

agency bonds

Back 1

Bonds issued by federal government agencies. Agency bonds are not explicitly backed by the full faith and credit of the U.S. government. Agencies issue bonds to promote the formation of credit in certain sectors of the economy such as real estate, education, and farming.

Front 2

ask

Back 2

The price that an investor pays to a dealer to purchase a security. Also, the price at which a dealer stands ready to sell securities to investors.

Front 3

bid

Back 3

The price that an investor receives when they sell a security to a dealer. Also, the price at which a dealer stands ready to buy securities from investors.

Front 4

bid-ask spread

Back 4

The difference between the price at which a dealer is willing to buy and the price at which the dealer will sell. By selling at the ask, which is higher than the bid, the dealer makes a profit on each trade.

Front 5

bond ratings

Back 5

Grades assigned to bonds by specialized agencies that evaluate the capacity of bond issuers to repay their debts. Lower grades signify higher default risk.

Front 6

call price

Back 6

The price at which a bond issuer may call or repurchase an outstanding bond from investors.

Front 7

callable

Back 7

Bonds that the issuer can repurchase from investors at a predetermined price known as the call price.

Front 8

collateral

Back 8

The specific assets pledged to secure a loan.

Front 9

collateral trust bonds

Back 9

A bond secured by financial assets held by a trustee.

Front 10

convertible bond

Back 10

A bond that gives investors the option to redeem their bonds for shares of the issuer's stock rather than cash.

Front 11

corporate bonds

Back 11

Bonds issued by corporations.

Front 12

coupon

Back 12

A fixed amount of interest that a bond promises to pay investors.

Front 13

coupon rate

Back 13

The rate derived by dividing the bond's annual coupon payment by its par value.

Front 14

coupon yield

Back 14

The amount obtained by dividing the bond's coupon by its current market price (which does not always equal its par value).

Front 15

debentures

Back 15

Unsecured bonds backed only by the general faith and credit of the borrowing company.

Front 16

default risk

Back 16

The risk that the corporation issuing a bond may not make all scheduled payments.

Front 17

discount

Back 17

A bond sells at a discount when its market price is less than its part value.

Front 18

equipment trust certificates

Back 18

A secured bond often used to finance transporation equipment.

Front 19

exchangeable bonds

Back 19

Bonds issued by corporations which may be converted into shares of a company other than the company that issued the bonds.

Front 20

expectations theory

Back 20

In equilibrium, investors should expect to earn the same return whether they invest in long-term Treasury bonds or a series of short-term Treasury bonds.

Front 21

federal funds rate

Back 21

The interest rate that U.S. banks charge each other for overnight loans.

Front 22

floating-rate bonds

Back 22

Bonds that make coupon payments that vary through time. The coupon payments are usually tied to a benchmark market interest rate. Also called variable-rate bonds.

Front 23

indenture

Back 23

A legal document stating the conditions under which a bond has been issued.

Front 24

interest rate risk

Back 24

The risk that changes in market interest rates will cause fluctuations in a bond's price. Also, the risk of suffering losses as a result of unanticipated changes in market interest rates.

Front 25

junk bonds

Back 25

Bonds rated below investment grade (also known as high yield bonds).

Front 26

liquidity preference theory

Back 26

States that the slope of the yield curve is influenced not only by expected interest rate changes, but also by the liquidity premium that investors require on long-term bonds.

Front 27

London Interbank Offered Rate (LIBOR)

Back 27

The interest rate that banks in London charge each other for overnight loans. Widely used as a benchmark interest rate for short-term floating-rate debt.

Front 28

maturity date

Back 28

The date when a bond's life ends and the borrower must make the final interest payment and repay the principal.

Front 29

mortgage bonds

Back 29

A bond secured by real estate or buildings.

Front 30

municipal bonds

Back 30

Issued by U.S. state and local governments. Interest received on these bonds is exempt from federal income tax.

Front 31

nominal return

Back 31

The stated return offered by an investment unadjusted for the effects of inflation.

Front 32

par value (bonds)

Back 32

The face value of a bond, which the borrower repays at maturity.

Front 33

preferred habitat theory

Back 33

A theory that recognizes that the shape of the yield curve may be influenced by investors who prefer to purchase bonds having a particular maturity regardless of the returns those bonds offer compared to returns available at other maturities.

Front 34

premium

Back 34

A bond that sells for more than its par value.

Front 35

prime rate

Back 35

The rate of interest charged by U.S. banks on loans to business borrowers with excellent credit records.

Front 36

principal

Back 36

The amount of money on which interest is paid.

Front 37

Protective covenants

Back 37

Provisions of the bond indenture that stipulate actions that the borrower must do (positive covenants) or actions that the borrower must not do (negative covenants).

Front 38

pure discount bonds

Back 38

Bonds that pay no interest and sell below par value. Also called zero-coupon bonds.

Front 39

putable bonds

Back 39

Bonds that investors can sell back to the issuer at a predetermined price under certain conditions.

Front 40

real return

Back 40

Approximately, the difference between an investment's stated or nominal return and the inflation rate.

Front 41

required rate of return

Back 41

The rate of return that investors require from an investment given the risk of the investment.

Front 42

sinking fund

Back 42

A provision in a bond indenture that requires the borrower to make regular payments to a third-party trustee for use in retiring the bond

Front 43

spread

Back 43

The difference between the rate that a lender charges for a loan and the underlying benchmark interest rate. Lenders charge higher spreads to less creditworthy borrowers.

Front 44

subordinated debentures

Back 44

An unsecured bond that has a legal claim inferior to other outstanding bonds.

Front 45

term structure of interest rates

Back 45

The relationship between yield to maturity and time to maturity among bonds having similar risk.

Front 46

Treasury bills

Back 46

Debt instruments issued by the federal government that mature in less than one year.

Front 47

Treasury bonds

Back 47

Debt instruments issued by the federal government with maturities longer than 10 years.

Front 48

Treasury Inflation-Protected Securities (TIPS)

Back 48

Notes and bonds issued by the federal government that make coupon payments that vary with the inflation rate.

Front 49

Treasury notes

Back 49

Debt instruments issued by the federal government with maturities ranging from 1to 10 years.

Front 50

Treasury STRIP

Back 50

A zero-coupon bond representing one coupon payment or the final principal payment made by an existing Treasury note or bond.

Front 51

yield curve

Back 51

A graph that plots the relationship between yield to maturity and maturity for a group of similar bonds.

Front 52

yield spread

Back 52

The difference in yield to maturity between two bonds or two classes of bonds with similar maturities.

Front 53

yield to maturity

Back 53

The discount rate that equates the present value of the bond's cash flows to its market price.