Chapter 7: Interest Rates and Bond Valuation

Coupon Rate

The annual coupon divided by the face value of a bond.

Interest Rate Risk Premium

The compensation investors demand for bearing interest rate risk.

Inflation Premium

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

Dirty Price

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

Clean Price

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

Yield To Maturity (YTM)

The rate required in the market on a bond.

Term Structure of Interest 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.

Fisher Effect

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

Interest Rate Risk

The risk that arises for bond owners from fluctuating interest rates

Maturity

The specified date on which the principal amount of a bond is paid

Indenture

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

Collateral

any asset pledged on a debt

Zero Coupon Bonds

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

Current Yield

A bond's annual coupon divided by its price.

Debenture

An unsecured debt, usually with a maturity of 10 years or more

Note

An unsecured debt, usually with a maturity under 10 years

Real Rates

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

Nominal Rates

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

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 that are generically called bonds

Convertible Bond

a bond that can be swapped for a fixed number of shares of stocks anytime maturity at the holder's option

Level Coupons Bond

coupons that are constant and paid every year

Mortgage Securities

secured by a mortgage on the real property of the borrower,

Face Value

the principal amount of a bond that is repaid at the end of the term. Also called par value

Coupons

the stated interest payment made on a bond.

Debt Securities

typically called notes, debentures, or bonds

Discount Bond

when the bond selld for less than its face value