FIN 325 - Chapter 7

Zero-coupon bond

A bond that makes no interest payments

Interest-only loan

A loan in which the borrower pays interest periodically and repays the principal when the bond matures.

Real rate of return

A rate of return that has been adjusted for inflation.

Nominal rate of return on an investment

A rate that has not been adjusted for inflation.

Structured note

Based on financial securities, commodities, or currencies

Municipal bonds

Bonds issued by state and local governments

Convertible bond

Can be exchanged for shares of the issuer's stock

What are three important features of Treasury notes and bonds?

Highly liquid, Default-free, Taxable

Put bond

Owner can force issuer to repay prior to maturity at a stated price

CAT bond

Protects insurance companies from natural disasters

Which of the following are features of municipal bonds?

The interest on municipal bonds is exempt from federal taxes; They are issued by state and local governments.

Bond's time to maturity

The number of years until the face value is due to be repaid.

When the US government wants to borrow money for the long-term (more than one year) it issues:

Treasury bonds, Treasury notes

What is a corporate bond's yield to maturity (YTM)?

YTM is the expected return for an investor who buys the bond today and holds it to maturity; YTM is the prevailing market interest rate for bonds with similar features.

A corporate bond's yield to maturity _______.

can be greater than, equal to, or less than the bond's coupon rate; changes over time

When interest rates in the market fall, bond values are likely to increase because the present vale of the bond's remaining cash flows _______.

increases

In general, a corporate bond's coupon rate _______.

is fixed until the bond matures

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is _______ $1,000.

less than