FRL 300 Chapter 7

all other things being equal, the lower the coupon rate, the ____ the interest rate risk

greater

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

bearer form

longer term issues( longer than 10 years)

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

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

face value

all things being equal, the longer the time to maturity, the ____ the interest rate risk

greater

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

indenture

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

inflation premium

a bond is normally an ___ only loan

interest

the compensation investors demand for bearing interest rate risk

interest rate risk premium

the bond with the higher coupon has a _____ cash flow early in its life, so its value is less sensitive

larger

when the government wishes to borrow money for more than one year, it sells what are known as ____ bonds

Treasury

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

call premium

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

call provision

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

call-protected

the reason the current yield is too low is that it considers only the _____ portion of your return; it doesn't consider the built-in gain from the price discount

coupon

the stated interest payment made on a bond

coupon

where term structure is based on pure discount bonds, the yield curve is based on ____ bond yields

coupon

the person or firm making the loan

creditor, lender

the annual coupon divided by the face value of a bond

coupon rate

bond value= present value of _____ + present value of the ____ ____

coupons, face amount

Debt is not an ownership interest in the firm. ______ generally do not have voting power

creditors

a bond's annual coupon divided by its price

current yield

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

debenture

equity holders are paid after ___ holders

debt

the corporation's payment of interest on _____ is considered a cost of doing business and is fully tax deductible.

debt

the corporation borrowing the money is called the

debtor, borrower

when interest rates rise, the PV of the bond's remaining CF's ______, and the bond is worth less. When interest rates fall, the bond is worth _____

decline, more

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

default risk premium

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

deferred call provision

bond selling for less than face value

discount

As a general rule, _______ represents an ownership interest, and it is a residual claim.

equity

one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when ____ is issued

equity

Unpaid debt is a ____ of the firm. If it is not paid, the creditors can legally claim the assets of the firm.

liability

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

liquidity premium

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

maturity

state and local governments also borrow money by selling notes and bonds, they are called

munis

these are very attractive to high-income, high tax-bracket investors

munis

these have coupons that are exempt from federal income taxes though not necessarily state income taxes

munis

these have varying degrees of default risk, and are rated much like corporate issues

munis

the term structure of interest rates tells us what _____ interest rates are on default-free, pure discount bonds of all maturities.

nominal

interest rates or rates of return that have not been adjusted for inflation

nominal rates

an unsecured debt, usually with a maturity under 10 years

note

issues with an original maturity of 10 years or less are often called

notes

bond prices and interest rates always move in ____ directions

opposite

bond selling for more than face value

premium

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

protective covenant

interest rates or rates of return that have been adjusted for inflation

real rates

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

registered bond

an account managed by the bond trustee for the purpose of repaying the bonds

sinking fund

early repayment in some form is more typical and is often handled through a

sinking fund

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

taxability premium

the relationship between short and long term interest rates is known as the

term structure of interest rates

treasury yields depend on the three components that underlie the term structure-

the real rate, expected future inflation, and the interest rate risk premium

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

treasury yield curve

when long term rates are higher than short term rates, we say the term structure is ____ sloping; when short term rates are higher, we say it is _______ sloping.

upward, downward

the rate required in the market on a bond

yield to maturity

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

zero coupon bond