Chapter 7 Bonds Vocabulary

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Zero Coupon Bonds

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

Call Protected Bond

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

Current Yield

A bond's annual coupon divided by its price

Deferred Call Provision

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

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

Sinking Fund

An account managed by the bond trustee for early bond redemption

Call provision

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

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

Call Premium

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

Registered Form

The form a bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record

Bearer Form

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.

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.

Bid Price

The price a dealer is willing to pay for a security

Asked Price

The price a dealer is willing to take for a security

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.

Face Value

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

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

Maturity

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

Coupons

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.

bid-ask spread

difference between the bid price and the asked price

Liquidity premium

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


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