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54 Cards in this Set
- Front
- Back
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annuity
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An annuity is a series of payments of a fixed amount for a specified number of periods.
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bond
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A promissory note issued by a business or a governmental unit.
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call provision
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"Gives the issuing corporation the right to call the bonds for redemption. The call provision generally states that if the bonds are called
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capital gains yield
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"Results from changing prices and is calculated as (P1 ? P0)/P0
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Chapter 11
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"The business reorganization chapter of the Bankruptcy Reform Act. The chapter provides for the reorganization
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Chapter 7
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The chapter of the Bankruptcy Reform Act that provides for the liquidation of a firm to repay creditors.
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convertible bond
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"Security that is convertible into shares of common stock
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corporate bond
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"Debt issued by corporations and exposed to default risk. Different corporate bonds have different levels of default risk
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coupon interest rate
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"Stated rate of interest on a bond
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coupon payment
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Dollar amount of interest paid to each bondholder on the interest payment dates.
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current yield (on a bond)
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The annual coupon payment divided by the current market price.
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debenture
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"An unsecured bond
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default risk
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"The risk that a borrower may not pay the interest and/or principal on a loan as it becomes due. If the issuer defaults
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default risk premium (DRP)
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The premium added to the real risk-free rate to compensate investors for the risk that a borrower may not pay the interest and/or principal on a loan as they become due.
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development bond
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A tax-exempt bond sold by state and local governments whose proceeds are made available to corporations for specific uses deemed (by Congress) to be in the public interest.
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discount bond
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"Bond prices and interest rates are inversely related; that is
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EBITDA
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"Earnings before interest
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expectations theory
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"States that the slope of the yield curve depends on expectations about future inflation rates and interest rates. Thus
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floating-rate bond
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"A bond whose coupon payment may vary over time. The coupon rate is usually linked to the rate on some other security
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foreign bond
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"A bond sold by a foreign borrower but denominated in the currency of the country in which the issue is sold. Thus
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income bond
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"Pays interest only if the interest is earned. These securities cannot bankrupt a company
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indentures
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A legal document that spells out the rights of both bondholders and the issuing corporation.
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"indexed
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or purchasing power
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inflation premium (IP)
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The premium added to the real risk-free rate of interest to compensate for the expected loss of purchasing power. The inflation premium is the average rate of inflation expected over the life of the security.
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interest rate risk
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"Arises from the fact that bond prices decline when interest rates rise. Under these circumstances
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investment grade bond
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Securities with ratings of Baa/BBB or above.
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investment strategy
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Deals with the question of how the pension assets portfolio should be structured given the assumed actuarial rate of return.
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junk bond
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"High-risk
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liquidity premium (LP)
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"A liquidity premium is added to the real risk-free rate of interest
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maturity date
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The date when the bond?s par value is repaid to the bondholder. Maturity dates generally range from 10 to 40 years from the time of issue.
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maturity risk premium (MRP)
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"The premium that must be added to the real risk-free rate of interest to compensate for interest rate risk
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mortgage bond
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A bond for which a corporation pledges certain assets as security. All such bonds are written subject to an indenture.
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municipal bond
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"Issued by state and local governments. The interest earned on most municipal bonds is exempt from federal taxes
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municipal bond insurance
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An insurance company guarantees to pay the coupon and principal payments should the issuer of the bond (the municipality) default. This reduces the risk to investors who are willing to accept a lower coupon rate for an insured bond issue compared to an uninsured issue.
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"nominal rate of return
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rn "
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"nominal risk-free rate of interest
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rRF "
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normal yield curve
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"When the yield curve slopes upward
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original issue discount (OID) bond
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"In general
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par value
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"The nominal or face value of a stock or bond. The par value of a bond generally represents the amount of money that the firm borrows and promises to repay at some future date. The par value of a bond is often $1
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"payment
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PMT "
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premium bond
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"Bond prices and interest rates are inversely related; that is
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PV
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"The value today of a future payment
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"real risk-free rate of interest
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r* "
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redeemable bond
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"Gives investors the right to sell the bonds back to the corporation at a price that is usually close to the par value. If interest rates rise
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reinvestment rate risk
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"Occurs when a short-term debt security must be ?rolled over.? If interest rates have fallen
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sinking fund
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"Facilitates the orderly retirement of a bond issue. This can be achieved in one of two ways: (1) the company can call in for redemption (at par value) a certain percentage of bonds each year
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subordinated debenture
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"Debentures that have claims on assets
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term structure of interest rates
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The relationship between yield to maturity and term to maturity for bonds of a single risk class.
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Treasury bond
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Bonds issued by the federal government; sometimes called T-bonds or government bonds. Treasury bonds have no default risk.
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warrant
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"A call option issued by a company allowing the holder to buy a stated number of shares of stock from a company at a specified price. Warrants are generally distributed with debt
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yield curve
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The curve that results when yield to maturity is plotted on the Y axis with term to maturity on the X axis.
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yield to call (YTC)
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"The rate of interest earned on a bond if it is called. If current interest rates are well below an outstanding callable bond?s coupon rate
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yield to maturity (YTM)
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The rate of interest earned on a bond if it is held to maturity.
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zero coupon bond
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Pays no coupons at all but is offered at a substantial discount below its par value and hence provides capital appreciation rather than interest income.
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