Chapter 7- Bonds And Their Valuation

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bond

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long term debt instrument

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treasury bonds

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bonds issued by the federal government, sometimes referred to as government bonds

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corporate bonds

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bonds issued by corporations

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municipal bonds

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bonds issued by state and local governments

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foreign bonds

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bonds issued by foreign governments or by foreign corporations

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par value

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the face value of a bond

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coupon payment

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the specified number of dollars of interest paid each year

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coupon interest rate

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the stated annual interest rate on a bond

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fixed-rate bond

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a bond whose interest rate is fixed for its entire life

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floating rate bond

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a bond whose interest rate fluctuates with shifts in the general level of interest rates

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zero coupon bond

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a bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation

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original issue discount (OID) bond

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any bond originally offered at a price below its par value

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maturity date

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a specified date on which the par value of a bond must be repaid

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original maturity

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the number of years to maturity at the time a bond is issued

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call provision

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a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date

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sinking fund provision

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a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year

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convertible bond

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a bond that is exchangeable at the option of the holder for the issuing firms common stock

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warrant

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a long-term option to buy a stated number of shares of common stock at a specified price

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putable bond

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a bond with a provision that allows its investors to sell it back to the company prior to maturity at a prearranged price

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income bond

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a bond that pays interest only if it earned

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indexed (purchasing power) bond

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a bond that has interest payments based on an inflation index so an inflation index so as to protect the holder from inflation

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discount bond

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a bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate

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premium rate

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a bond that sells above its par value, occurs whenever the going rate of interest is below the coupon rate

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yield to maturity

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the rate of return earned on a bond if it is held to maturity

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yield to call

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the rate of return earned on a bond when it is called before its maturity date

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price (interest rate) risk

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the risk of a decline in a bonds price due to an increase in interest rates

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reinvestment risk

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the risk that a decline in interest rates will lead to a decline in income from a bond portfolio

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investment horizon

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the period of time an investor plans to hold a particular investment

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duration

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the weighted average of the time it takes to receive each of the bonds cash flows

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mortgage bond

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a bond backed by fixed assets. first mortgage bonds are senior in priority to claims of second mortgage bonds

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indenture

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a formal agreement between the issuer and the bondholders

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debenture

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a long term bond that is not secured by a mortgage on specific property

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subordinated debenture

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a bond having a claim on assets only after the senior debt has been paid in full in the event of liquidation

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investment grade bond

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bonds rated triple B or higher, many banks and other institutional investors are permitted by law to hold only investment grade bonds

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junk bond

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a high risk high yield bond