Chapter 7

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.

Sinking Fund

A fund that the issuer sets up with mandatory payment s to guarantee the capital to repay the bond issue. Decreased risk & thus yield.

Protective Covenants

A part of the indenture limiting certain action that might be taken during the term of the loan, usually to protect the lender.

Treasury Yield Curve

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

Call Provision

A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.

Taxability Premium

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

Put Bond

Allows the holder to force the issuer to buy back the bond at a stated price

Collateral Securities

An asset that a bank hold as security for the repayment of a loan

Debenture

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

Note

An unsecured debt, usually with a maturity under 10 years

Convertible Bonds

Bonds that can be converted into common stock at the bondholder's option

Income Bonds

Bonds that pay interest contingent on the issuer's profitability.

Warrant

Gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price.

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

Is the difference between the call price and the stated value.

Mortgage Securities

Secured by a mortgage on the property of borrowers, usually a house.

Debt Securities

Securities issued by corporations and governmental bodies as a form of borrowing.

Equity Securities

Securities issued by corporations as a form of ownership in the business.

Coupon Rate

The annual coupon divided by the face value of the bond

Bond Yield

The annual rate of return on a bond investment. Types of yield include nominal yield, current yield, yield to maturity, and yield to call. Their relationships vary according to whether the bond in question is at a discount, a premium, or at par.

Interest Rate Risk Premium

The compensation investors demand for bearing interest rate risk.

Bid-Asked Spread

The difference between the bid price and the asked price

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.

Registered Form

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.

Liquidity Premium

The portion of a nominal interest rate or bond that represents compensation for lack of liquidity.

Default Risk Premium

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

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 the 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.

The 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

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