Finance - Ch. 7: Interest Rates and Bond Valuation
call provision
an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity
debenture
an unsecured debt, for which no specific pledge of property is made, usually with a maturity of 10 years or more
note
an unsecured debt, usually with a maturity under 10 years
level coupon bone
coupon that is constant and paid every year
collateral
general term that frequently means securities that are pledged as security for payment of debt (ex: bonds and stocks)
seniority
indicates preference in position over other lenders, and debts are sometimes labeled as senior or junior to indicate seniority
equity securities and debt securities
securities issued by corporations
coupon rate
the annual coupon divided by the face value of a bond
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
maturity
the specified date on which the principal amount of a bond is paid; # of years until face value is paid; corporate bonds = usually 30 years; years to maturity declines as time goes on
coupon
the stated interest payment made on a bond each period
indenture
the written agreement between the corporation and the lender detailing the terms of the debt issue (aka deed of trust)
current yield
a bond's annual coupon divided by its price
par value bond
a bond that sells for its par value
sinking fund
an account managed by the bond trustee for early bond redemption
discount bond
bond that sells less than face value
mortgage trust indenture or trust deed
legal document that describes the mortgage
blanket mortgage
pledges all the real property owned by the company
What happens to bonds when interest rates decrease?
the PV of bond increases, making bond is worth more
call premium
the amount by which the call price exceeds the par value of a 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
What happens to bonds when interest rates increase?
the present value of the bond's decrease, making bond worth less
face value (aka par value)
the principal amount of a bond that is repaid at the end of the term; usually $1000 for corporate bonds
yield to maturity (YTM)
the rate required in the market on a bond
interest rate risk
the risk that arises for bond owners from fluctuating interest rates
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 = bonds; usually an interest-only loan