finance test2 bonds

bond rating

1) triple-a/ AAA- highest quality, minimal risk, low probability of default- Johnson and Johnson and Microsoft 2) double A- high quality grade 3) single A- upper-medium 4) Baa or BBB- low-medium grade- investment grade 5) Ba1 or lower or BB or lower- high default risk, low grade 6) D is for securities in default 7) C are most likely in default

treasury bills

zero-coupon bonds, issued by the US gov, with maturity of up to 1 year

largest securities market-trading volume

US treasury market

zero-coupon bond

a bond that only makes one payment at maturity

treasury yield curve

a plot of the yields on treasury notes and bonds relative to maturity -determined by real rate of interest, expected inflation, interest rate risk- based on coupon bond yields -free of default

putability

after a certain period, the bondholder has the right to demand payment of the loan before maturity

convertibility

after a certain period, the bondholder has the right to exchange the bond for stocks of the issuer

callability- option provision

after a certain period, the issuer has the right to pay back the loan before maturity

yield

bond yield too high- bond can be undervalued bond yield too low- bond voervalued -if assume value=price, you assume markets are always efficient

current yield

bond's annual coupon/ price

coupon bonds

bonds that pay regular coupon interest payments up to maturity, when the face value is also paid

bond sensitivity*

bonds with longer maturities, more sensitive to change in interest rates bonds with lower coupons, more sensisitve to changes in interest rates

debt

borrowing of money

bond

contractual agreement between the issuer and the bondholders

coupon payment

coupon rate (face value) / number of coupon payments per yr

coupon rate

determines the amt of each coupon payment of a bond-expressed as an APR- total an ueal interest payment per dollar of face value

relationship between yield and price*

indirect- bond price inc, yield decreases

fixed- income debt

instruments contractually include predetermined payment schedules that usually include interest and prinicpal payments

real rate of interest

interest rates adjusted for inflation- rate of growth of your purchasing power -compensation investors demand

nominal rate of interest

interest rates not adjusted for inflation

protective convenant

part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect lender's interest -negative covenant- limits/prohibits actions a company might take- thou shall not -positive covenant- specifies an action the company agrees to take or a condition the company must abide by

liquidity premium

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

default risk premium

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

taxability premium

portion of nominal interest rate or bond yield that reps compensation for unfavorable taxes

par

price at which a coupon bond trades that is equal to the face value

discount

price at which bonds trade is less than their face value

premium

price at which coupon bonds trade that is greater than their face value

credit risk

risk of default, bonds cash flows are not known with certainty -yield to maturity with bonds with more credit risk are higher

term

short- less than 1 yr- T-bills long- more than one year -t-notes- 1-10, t-bonds, more than 10m corporate bonds, consols

bond certificate

states the terms of a bond as well as the amounts and dates of all payments to be made- notes, bonds, asset back securities

interest rate risk premium

the compensation investors demand for bearing interest rate risk -long term bonds- more risky- investors demand compensation for risk in form of higher rates

maturity date

the final repayment date 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

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 the record

face value/par value/principal amount

the notional amount of a bond used to compute its interest payments- due at the bond's maturity

inflation premium

the portion of a nominal interest rate that represents compensation for expected future inflation -if inflation rights higher in future, long-term nominal interest rates will be higher than short-term rates

inflation premium

the portion of a nominal interest rate that represents compensation for expected future inflation- if inflation higher- long term nom interest rates are higher than short-term -upward-sloping structure may mean higher inflation

coupons

the promised interest payments of a bond, paid periodically until the maturity date of a bond

yield to maturity/yield*

the rate of return of an investment in abond that is held to its maturity date or the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond

fisher effect

the relationship among nominal returns, real returns, and inflation nominal rate= (1+ real rate) x (1+inflation rate) -1

credit risk*

the risk of default!!! by the issuer of any bond that is not default free- bonds cash flows are not certain -may default, risk free

term/tenor

the time remaining until the bond's maturity date

indenture

the written agreement between the corporation and the lender detailing the debt issue- includes provisions

treasury bonds

type of us treasury coupon security, currently traded in financial markets, with original maturities 10+ years

treasury notes

type of us treasury coupon security, currently traded in financial markets, with original maturities from 1-10 years

debenture

unsecured debt

risk-free

us treasury securities are widely regarded to be risk-free because there is virtually no chance the government will fail to pay the interest and default on the bonds -risk-free interest rate= closest proxy we hae is the rate on us treasuries

bond issuers

us treasury/government states, municipalties, agencies corporations foreign government (sovereign bobds)