Finance Vocab Chapter 7 Bond Valuation

Front 1

Coupon

Back 1

The stated interest payment made on a bond

Front 2

Face or Par Value

Back 2

the amount to repaid at the end of the loan

Front 3

Coupon Rate

Back 3

annual coupon, divided by the face value of a bond

Front 4

Maturity

Back 4

the number of years until the face value is paid

Front 5

yield to maturity (YTM)

Back 5

the rate required in the market on a bond

Front 6

Discounted Bond

Back 6

a bond that must be sold at less than face value, because the interest rate in the market dropped

Front 7

Premium Bond

Back 7

A bond that sells for more than its face value because interest rates in the market increased

Front 8

The longer the time to maturity, the _____ the interest risk.

Back 8

greater

Front 9

All other things being equal, the lower the coupon rate, the _______ the interest risk rate.

Back 9

greater

Front 10

Current Yield

Back 10

a bond's annual coupon divided by its price

Front 11

Equity and Debt Securities

Back 11

securities issued by corporations

Front 12

Indenture (deed of trust)

Back 12

the written agreement between the corporation and the lender detailing the terms of the debt issue

Front 13

Registered Form

Back 13

the form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record

Front 14

Bearer Form

Back 14

the form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond

Front 15

Debenture

Back 15

unsecured bond, junk bond, no collateral or pledge of property is made

Front 16

Note

Back 16

an unsecured debt, usually with a maturity of under 10 years

Front 17

Sinking Fund

Back 17

an account managed by the bond trustee for early bond redemption

Front 18

Call Provision

Back 18

allows the company to repurchase or "call" part or all of the bond issue at stated prices over a specific period (corp bond are usually callable)

Front 19

Call Premium

Back 19

the amount by which the call price exceeds the par value of a bond

Front 20

Deferred Call Provision

Back 20

a call provision prohibiting the company from redeeming a bond prior to a certain date

Front 21

Call-Protected Bond

Back 21

A bond that, during a certain period, cannot be redeemed by the issuer.

Front 22

Protective Covenant

Back 22

A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest.

Front 23

Zero Coupon Bond

Back 23

A bond that makes no coupon payments and is thus initially priced at a deep discount.

Front 24

Bid Price

Back 24

The price a dealer is willing to pay for a security.

Front 25

Asked Price

Back 25

The price a dealer is willing to take for a security.

Front 26

Bid-Ask Spread

Back 26

The difference between the bid price and the asked price.

Front 27

Clean Price

Back 27

The price of a bond net of accrued interest; this is the price that is typically quoted.

Front 28

Dirty Price

Back 28

The price of a bond including accrued interest; also known as the full or invoice price. This is the price the buyer actually pays.

Front 29

Real Rates

Back 29

Interest rates, or rates of return that have been adjusted for inflation.

Front 30

Nominal Rates

Back 30

Interest rates or rates of return that have not been adjusted for inflation.

Front 31

Fisher Effect

Back 31

The relationship between nominal returns, real returns, and inflation.

Front 32

Term structures of interest rates

Back 32

The relationship berween nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.

Front 33

Inflation Premium

Back 33

The portion of a nominal interest rate that represents compensation for expected future inflation.

Front 34

Interest rate risk

Back 34

The compensation investors demand for bearing interest rate risk.

Front 35

Treasury yield curve

Back 35

A plot of the yields on Treasury notes and bonds relative to maturity.

Front 36

Default Risk Premium

Back 36

The portion of a nominal interest rate or bond yield that represents compensation for that possibility of default.

Front 37

Taxability Premium

Back 37

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.

Front 38

Liquidity Premium

Back 38

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.