Chapter 7 - Interest Rates & Bonds

Warrant

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

Coupon Rate

The annual coupon divided by the face value of a bond

Coupon

The stated interest payment made on a bond

call protected bond

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

Zero coupon Bonds

a bond that pays no coupons at all must be offered at a price that is much lower than its stated value.

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

put bond

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

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.

current yield

bonds annual coupon divided by its price

convertible bond

can be swapped for shares of stock

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

Income bonds

similiar to conventional bonds, except that coupon payments depend on the company income. coupons are paid to the bondholder only if the firms income is sufficient.

call premium

the amount by which the call price exceeds the par value of a bond

interest rate risk premium

the compensation investors demand for bearing interest rate risk

floating rate bond

the coupon payment is adjustable. the adjustments are tied to an interest rate index such as the treasury bill interest rate.

bid-ask spread

the difference between the bid price and the asked price

bearer form

the form of bond issue in which bond is issued without record of the owners 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.

default risk premium

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

liquidity premium

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

taxability premium

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

inflation premium

the portion of 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 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 bond net of accrued interest this is the price that is quoted.

Face Value

the principal amount of a bond that is repaid at the end of the term - aka par value

(YTM) Yield to Maturity

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.

indenture

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