Finance - Ch. 7: Interest Rates and Bond Valuation

call provision

an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity

debenture

an unsecured debt, for which no specific pledge of property is made, usually with a maturity of 10 years or more

note

an unsecured debt, usually with a maturity under 10 years

level coupon bone

coupon that is constant and paid every year

collateral

general term that frequently means securities that are pledged as security for payment of debt (ex: bonds and stocks)

seniority

indicates preference in position over other lenders, and debts are sometimes labeled as senior or junior to indicate seniority

equity securities and debt securities

securities issued by corporations

coupon rate

the annual coupon divided by the face value of a bond

bearer form

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

maturity

the specified date on which the principal amount of a bond is paid; # of years until face value is paid; corporate bonds = usually 30 years; years to maturity declines as time goes on

coupon

the stated interest payment made on a bond each period

indenture

the written agreement between the corporation and the lender detailing the terms of the debt issue (aka deed of trust)

current yield

a bond's annual coupon divided by its price

par value bond

a bond that sells for its par value

sinking fund

an account managed by the bond trustee for early bond redemption

discount bond

bond that sells less than face value

mortgage trust indenture or trust deed

legal document that describes the mortgage

blanket mortgage

pledges all the real property owned by the company

What happens to bonds when interest rates decrease?

the PV of bond increases, making bond is worth more

call premium

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

registered form

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

What happens to bonds when interest rates increase?

the present value of the bond's decrease, making bond worth less

face value (aka par value)

the principal amount of a bond that is repaid at the end of the term; usually $1000 for corporate bonds

yield to maturity (YTM)

the rate required in the market on a bond

interest rate risk

the risk that arises for bond owners from fluctuating interest rates

bonds

when a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities = bonds; usually an interest-only loan