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77 Cards in this Set
- Front
- Back
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Time Value of Money
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The concept based on the belief that people have a positive time preference for consumption, preferring to consume goods today rather than in the future.
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Present Value
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the value today of a future stream of cash payments discounted at the appropriate discount rate
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Future Value
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The worth in the future of a currently held amount of money if it is invested and reinvested at known interest rates
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Compounding
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The calculation of future value based on the assumption that all interest earned will be reinvested to earn additional interest
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Discounting
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The calculation for finding the present value of some futures some of money
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Opportunity Cost
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The interest rate on the next best alternative investment
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Bond
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A contractual obligation of a borrower to make cash payments to a lender for a fixed number of years: upon maturity the lenders is paid the face value of the security
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Bond Issuer
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the entity that provides the bond, they pay the lender an interest rate on the money received
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Bond Holder
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the lender in a bond contract, the entity that purchased the bond as an investment
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Par, Principal, Face Value
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the stated or face value of a stock or bond. For debt instruments, the par value is usually the final principal payment
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Coupon Payment
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The principal and interest paid on a debt security for specified periods over time
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Coupon Rate
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the interest rate that is paid on a debt security
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Term-to-maturity
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the length of time until the final payment of a debt security
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Discount Bond
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a bond that sells below ists par or face value. A bond sells at a discount when the market rate of interests is above the bond's fixed coupon rate
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Par Bond
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a bond that is selling at it's par value
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Premium Bond
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A bond whose market price is above its par or face value.
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Zero-Coupon Bond
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Bonds that have no coupon payment but promise a single payment at maturity
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Credit Risk
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The possibility that the borrower will not pay back all or part of the interest or principal as promised
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Reinvestment Risk
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The risk resulting from market interst rate changes that cause a bond investor to have to reinvest coupon payments at int. rates different from a bonds promised yeild.
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Price Risk
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Interest rate changes can cause the market price of a bond to rise or fall, resulting in gains or losses for an investor
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Expected Yeild
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The expected return on a bond at the end of a relevant holding period based on predictions made from interest rate forecasts
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Realized Yeild
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The rate of return earned on a bond given the price paid and the cash flows actually received by the investor
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Total Return
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The return to a bond investor that reflects coupon payments, capital gains or losses, and potential changes in the interest rate at which coupon paymets are reinvested
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Bond Price Volatility
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The percentage change in bond price for a given change in yeild.
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Price-Yeild Profile
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A plot of a bonds price(y-axis) versus its market yeild(x-axis)
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Interest Rate Risk
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The risk that changes in intersts rates will cause an asset's price and realized yeild to differ from the peurchase price and initially anticipated yeild
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Duration
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The measure of int rate risk that considers both coupon rate and maturity; weighted avg of the number of years until the present value of each of the bonds cash flows is recieved
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Convexity
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The curve representing T-Bonds price/yeild relationship is convex. Thus convexity is the adjustment for the shape of the curve in the formula for estimating the precentage change in the price of the bond corresponding to a given change in the market interest rate
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Term Structure of Interest Rates
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the relationship between yeild and term to maturity on securities that differ only in length of time to maturity: graphically approximated by yeild curve
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Yeild Curve
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The graph of the relationship between interest rates on particular securities and their yeild to maturity. To construct yeild curves, bonds must be as similar in as many other characteristics as possible
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Forward Rate
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The interest rate that is expected to exist in the future
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Spot Rate
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The observed price at which current transactions take place
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Implied Forward Rate
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The forward rate of interest implied by the difference in a short term int rate and a longer term int rate. the rate necessary to make funds invested at the short rate and reinvested at the implied forward rate generate a return equal to that which could be obtained by buying the longer term security
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Liquidity Premium
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Additionaly interst paid by borrowers who issue illiquid securities to obtain long term funds. compenstates lenders who acquire a security that cannot be resold easily or quickly at par value
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Market Segmentation Theory
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theory that maintains that market participants have strong preferences for securities of a particular maturity and holds that they buy and sell securities consistent with these maturity preferences, resulting in the yeild curve being determined by the supply of and demand for securities at or near a particular maturity
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Preferred Habitat Theory
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the theory of the term structure of interest rates that suggests investors leave their preferred maturity range only if adequately compensated for the additioinal risk of investing in a security whose maturity does not match the investors investment horizon. an extension of the market segmentation theory
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Default Risk Premium
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The amount of additional compensation investors must receive for purchasing securities that are not free of default risk. The rate on U.S. Treasury securities is used as the default-free rate.
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Bond Ratings
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The credit ratings of bonds, principally by Moody's Investors Service and Standard and Poor's, ranked in order of the perceieved probability of their default and published as letter grades witht he highestgrade bonds being those with the lowest default risk.
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Investment Grade Bonds
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The bonds rated in the top four major rating categories by Moody's and Standard and Poor's
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Speculative Grade(Junk) bonds
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Bonds rated below Baa or BBB by bond rating agencies like Moody's and Standard and Poor's
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Municipal Securities
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Securities issued by state and local governments that sell for lower market yeilds than comparible securities issued by U.S. Treasury and private corporations; exempt from federal taxes
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Marketability
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The ease with which a financial claim can be resold. the greater the marketability, the lower its interest rate
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Call Option(Provision)
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the option of the bond issuer to buy back the bond at a specified price in advange of tthe maturity date; the price is usually set at the bond's par value or slightly above par.
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Put Option
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The option allowing the investor to sell an assett to the put issuer at a predetermined price
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Call Interest Premium
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The difference in interest rates between callable and comparable oncallable bonds
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Put Interest Discount
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The difference in interest rates between putable and similar nonputable bonds
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Conversion Yeild(discount)
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The difference in yeild between convertable bonds with the conversion option and similar bonds without this option
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Money Market
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A financial market in which financial claims with maturities of less than one year are sold. US T-Bills!
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Treasury Bill
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Direct obligation of the federal government with initial maturities ranging from 3 months to 1 year. considered to have no default risk and are the most marketable of any security
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Federal Agency
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An independent federal department or federally chartered corporation established by Congress and owned or underwritten by the US government
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Nonguaranteed Agency Debt
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Securities issued by federal agencies that are not guaranteed by the federal government against default
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Federal Funds
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immediately available funds that can be lent on an overnight basis to financial insititutions. banks may lend their depostes at the Fed to other financial insts. by transferring them through federal funds market loans
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Repurchase agreement
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A form of loan in which the borrower sells securities and simulatneously contracts to repurchase the same securities, either on call or on a sepcified date, at a price that will produce a specified yeild
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Letter of Credit
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A financial instrument issued by an importers bank that obligates the bank to pay the exporter a specified amount of money once certain conditions are fulfilled
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Reverse repurchase agreement
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the reverse(lending) side of a purchase agreement
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Commercial Paper
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An unsecured short term promisory note issued by a large creditworthy business or financial institiution. Maturities range from 1 to 270 days and or denominated in 1 million dollars or more. Direct placed commercial paper is sold by the seller to the buyer
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Bankers Acceptance
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A draft drawn on a bank by a corporation to pay for merchandise. The draft promises payment of a certain sujm of money to its holder at some future date. In effect, the bank substitutes its credit standing for that of the issuing corporation
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Treasury Notes and Bonds
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Similar to T-Bills in that they are issuted by the Treasury and are default free. But are coupon issues, redeemable at face value upon maturity, and have initial maturities greater than one year and no more than 10 years
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Treasury Inflation Protection Secturities (TIPS)
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treasury securities that have a fixed coupon rate, but a principal amount that changes in response to changes in the inflation rate
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Separate Trading of Registered Interest and Principal (STRIP)
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A treasury security that has been sperated into its component parts: each interest payment and the principal payment become a seperate zero-coupon security
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General Obligation Bonds
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State and local government bonds backed by the "full faith and credit" of the issuing political entity; they require voter approval
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Term bonds
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A bond issuue in which all of the bonds that comprise the issue mature on a single date
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Industrial Development Bonds (IDB)
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Municipal revenue bonds that are issued by private companies. the municipality assumes no legal liability in the event of a default
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Mortgage Backed Bonds
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Bonds that can be issued by holders of mortgages; they pay interest semiannually and have a fixed maturity. Exs- FHLMC and FNMA
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Serial Bond Issue
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a municipal bond issue which contains a range of maturity dates rather than all of the bonds in the issue having the same maturity date
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Bearer Bonds
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Bonds for which coupons are attached and the holder presents them for payment when they come due
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Registered Bonds
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Bonds for which the bondholders nam eis recorded and coupon payments are mailed to the bondholders. No coupons are physcally attached to the bond.
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Indenture
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states the rights, privileges, and obligations of the bond issuer and bondholder
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debenture bonds
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Bonds for which no assets have been pledged as collateral. these bonds are secured only by the firms potential to generate payments to a merchant at the point of sale
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subordinated debt
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In the event of default, subordinated debt holders claims to the companys assets rnak behind senior debt; also known as junior debt
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sinking fund
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A corporate bond provision that requires the bond issuer to provide funds to a trustee to retire a specific dollar amount of bonds each year
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competitive sale
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A type of public offering in which the company selects the invetsment banker who will conduct the offering based on which investment banker offers to pay the highest net proceeds for the securities
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negotiated sale
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A type of public offering in which the company selects the inestment banker who will conudct the offering and then negotiates the net proceeds that the company will receive for the securities
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private placement
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the distribution of some equity securities in which the invesment banker acts only as the companys agent and receives a commission for placing the securities with investors
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Rule 144A
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SEC rule that allows secondary trading of private securities by large institutional investors
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Yankee Bonds
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Bonds issued by foreign entitites in the United States
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Samurai Bonds
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Bonds issued in Japan by foreign investors
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