Finance Exam 2
Negative covenant
thou shalt not type of covenant - limits or prohibits actions the company might take
Positive covenant
"thou shalt" - specifies an action the company agrees to take or a condition the company must abide by
Some sinking funds start about ___ after the initial issuance
10 years
Par value is usually
1000
Call protected
A bond that cannot be redeemed do to call provision
Treasury Yield Curve
A plot of the yields on treasury notes and bonds relative to maturity
Highest rating a firms debt can have is
AAA or Aaa - best quality lowest degree of risk
NPV Positive
Accept
Face value
Amount that will be repaid at the end of the loan (par value)
Sinking Fund
An account managed by the bond trustee for the purpose of repaying the bonds. Company makes annual payments to the trustee, who then uses the funds to retire a portion of the debt
Current Yield
Annual Coupon divided by price
Coupon Rate
Annual coupon divided by the face value
Zero Coupon Bonds
Bond that pays no coupons at all must be offered at a price that is much lower than its stated value
Municipal Notes
Borrowing money by buying and selling notes
Dirty Price
Full or invoice price
Coco bonds
Have a coupon payment
NoNo bonds
Have zero coupons
Seniority
Indicates preference in position over other lenders and debts
Describe the 2 sources of return from investing in a bond
Interest on interest, change in bond price
Real rates
Interest rates or rates of return that have been adjusted for inflation
Sukuk
Islamic bonds
Nominal Rates
Not adjusted for inflation
Maturity
Number of years until the face value is paid
Bid
Price a dealer is willing to pay
Asked price
Price dealer is willing to take
Deferred call provision
Prohibits company from redeeming a bond before a certain date
Clean price
Quoted Price
NPV Negative
Reject
Coupons
Stated interest payment made on a bond
Coupon
Take the rate * FV
Interest rate risk
The compensation investors demand for bearing interest rate risk
Yield to Maturity
The interest rate required in the market on a bond (the bonds yield)
Liquidity premium
The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
Default risk premium
The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
Taxability Premium
The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax states
Inflation Premium
The portion of a nominal interest rate that represents compensation for expected future inflation
Term Structure of Interests Rates
The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is the pure time value of money
The Fisher Effect
The relationship between nominal returns, real returns and inflation
Always accept NPV project
True
Bond
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
Call Provision
allows the company to repurchase or "call" part or all of the bond issue at state prices over a specific period - Corporate bond callable
Put bond
allows the holder to force the issuer to buy back the bond at a stated price
Structured notes
bonds based on stocks, bonds, commodities, or currencies
To determine make whole call price
calculate present value of the remaining interest and principal payments at a rate specified in the indenture
Convertible bond
can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option
Death Bond
companies purchase life insurance policies from individuals who are expected to die within 10 years
Floating rate bonds
coupon payments are adjustable
Catasphrophe bons
covers hurricanes and earthquakes
Call premium
difference between the call price and the stated value when the call price is above the bond's stated value
Transparent
financial market where you can easily observe its prices and trading volume (New York Stock Exchange)
To determine the value of a bond at a particular point you need to know
number of periods until maturity, the face value, the coupon and the market interest rate for bonds with similar features
Protective covenant
part of the indenture or loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan - 2 types
Reverse convertible
redemption at maturity can be paid in cash at par value or paid in shares of stock
Inome bonds
similar to conventional bonds, except that coupon payments depend on company income
Interest rates change in the market place, cash flows
stay the same