Chapter 6 (Exam 2)

Which one of the following bonds represents the greatest interest rate risk? - 10-year, zero-coupon bond - 10-year, 6 percent coupon bond - 5-year, zero-coupon bond - 5-year, 6 percent coupon bond

10-year, zero-coupon bond

Bearer form

A bond issued without record of the owner's name; payment is made to whomever holds the bond.

Zero coupon bond

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

Current Yield

A bond's coupon payment divided by its closing price.

Protective covenant

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.

Treasury yield curve

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

Call Provision

Agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity.

Sinking Fund

An account managed by the bond trustee for early bond redemption.

Which one of the following ratings is an investment-grade rating? Ba BB Baa B

Baa

Deferred call provision

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

Which one of the following permits a bond issuer to repurchase a portion or all of the bond issue at a stated price prior to maturity? - call provision - positive covenant - deed of trust - trust indenture

Call Provision

Which one of the following best describes a bond that can be exchanged for shares of the issuer's common stock? floating-rate bond income bond put bond convertible bond

Convertible bond

Bond ratings measure which type of risk?

Default

Which one of the following terms is defined as the written agreement between a bond's issuer and its creditors that details all of the terms of the debt issue? - indenture - covenant - by-laws - debenture

Indenture

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.

Maturity

Specified date on which the principal amount of a bond is paid.

Call Premium

The amount by which the call price exceeds the par value of the bond.

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.

Bid-Ask Spread

The difference between the bid price and the asked price.

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 status.

inflation premium

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

Asked price

The price a dealer is willing to take for a security.

Dirty Price (full or invoice price)

The price of a bond including accrued interest. 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.

Face Value (or Par Value)

The principal amount of a bond that is repaid at the end of the term.

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.

Coupon

The stated interest payment made on a bond.

Indenture

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

Debenture

Unsecured debt, usually with a maturity of 10 years or more.

Note

Unsecured debt, usually with a maturity of under 10 years.

Which one of the following is NOT included in the term structure of interest rates? real rate default risk premium inflation premium interest rate risk premium

default risk premium

Which one of the following is compensation to a bond holder for the inability of that holder to sell his or her bond quickly and receive its actual value? liquidity premium default risk premium taxability premium inflation premium

liquidity premium