FI312(Exam2-Bonds)

Speculative grade or junk bond

A bond rated BB or lower by Standard & Poor's, or Ba or lower by Moody's, or an unrated bond.

sinking fund

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

Foreign Bonds

Bonds issued by foreign governments or by foreign corporations

Eurobonds

Bonds issued in a country not in that country's currency.

investment grade bonds

Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only these kind of bonds -bonds that are issued by financially stable companies or municipalities

inverse floaters

Coupon rate falls when interest rates rise & vice versa -bonds suffer when rates rise

Puttable bonds

Give the holder an option to retire or extend the bond

forward rate

an interest rate applicable to a financial transaction that will take place in the future -the inferred short-term rate of interest for a future period that makes the expected total return of a long-term bond equal to that of rolling over short-term bonds

zero coupon bond

a bond that makes no coupon payments and is thus initially priced at a deep discount -provides only payment at par value

subordinate clause

a clause that restricts the amount of additional borrowing a firm can take

bond

a formal contract to repay borrowed money with interest at fixed intervals

bond indenture

a legal document that details all the conditions relating to a bond issue; contract between issuer and holder

Credit Default Swap

an insurance policy on the default risk of a corporate bond or loan -designed to allow lenders to buy protection against losses on large loans -later used to speculate on financial health of companies

coupon payment

an interest payment on a bond

horizon analysis

analysis of bond returns over a multiyear horizon, based on forecasts of the bond's yield to maturity and the reinvestment rate of coupons

premium bonds

bonds selling above par value

discount bonds

bonds selling below par value

convertible bonds

bonds that are exchangeable for the issuing firm's common stock

callable bonds

bonds that may be repurchased by the issuer at a specified call price during the call period

floating rate bonds

bonds with coupon rates periodically reset according to a specified market rate

realized coupon return

compound rate of return on a bond with all coupons reinvested until maturity

catastrophe bonds

corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs

t-bonds

coupon debt with original maturity > 10-30 years

t-notes

coupon debt with original maturity between 1-10 years

index bonds

coupon payments are tied to a general price index

mortgage bond

if the collateral is property

collateral trust bond

if the collateral takes the form of other securities held by the firm

accrued interest

interest revenue or expense that is recognized before cash has been exchanged

Pay-in-kind bonds

issuers can pay interest in cash or additional bonds

expected yield

must take into account possibility of a default

par/face value

official stated value of the stock; amount paid at maturity

TIPS (Treasury Inflation Protected Securities)

provide protection against inflation

collateral

something pledged as security for repayment of a loan, to be forfeited in the event of a default.

preferred stock

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.

asset-backed bonds

the income from a specified group of assets is used to service the debt

coupon rate

the interest rate that a bond issuer will pay to a bondholder

yield to maturity

the rate of return a bondholder will receive if the bond is held to maturity (discount rate)

yield to call

the rate of return earned on a bond when it is called before its maturity date

indenture

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

true

true or false: HPR is rate of return (ROR) of particular stock; depends on market price at the end of the period

false; inversely related

true or false: bond prices rise as market interest rate rises

false; longer

true or false: bonds with shorter maturities are more sensitive to fluctuations in IR

true

true or false: interest rate fluctuations are the primary source of bond market risk

reinvestment rate risk

uncertainty surrounding the cumulative future value of reinvested bond coupon payments

debenture

unsecured bond; not backed by collateral

1. coverage ratios 2. leverage ratios/debt-to-equity ratio 3. liquidity ratio 4. profitability ratio 5. cash flow to debt ratio

what are the 5 determinants of bond safety?

promise or stated yield

will be realized only if the firm meets the obligations of the bond issue; maximum possible yield to maturity of the bond