Finance Chapter 6
Face / Par Value
The amount that will be repaid at the end of the loan is called the bonds ________
Interest Rate Risk Premium
The compensation investors demand for bearing interest rate risk
Debtor / Borrower
The corporation borrowing the money is called ________
Bid-Ask Price
The difference between the two prices is called the _________ (or spread) and it represents the dealers profit
private-issue debt is directly placed with a lender
The main difference between public-issue and private-issue debt is that ___________________ and not offered to the public.
Liquidity premium
The portion of a nominal interest rate or bond yield 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
Taxability premium
The portion of the nominal interest rate or bond yield that represents compensation for unfavorable tax status
Asked Prices
The price a dealer is willing to take for a security
Dirty Price
The price of the bond included accrued interest, also known as the full or invoice price. *This is the price the buyer actually pays*
Registered Form
The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record
Fisher Effect
The relationship among nominal returns, real returns, and inflation *(1+R) = (1+r)(1+h)* R = nominal rate r = real rate h = expected inflation rate Approx: R = r + h
Term Structure of Interest Rate
The relationship between nominal interest rate on default-free, pure discount securities and time to maturity; that is, the pure time value of money
Interest Rate Risk
The risk that arises for bond owners from fluctuating interest rates is called _______
put bond
allows the holder to force the issuer to buy the bond back at a stated price
Current Yield
bond's annual coupon divided by its price
Inflation-Linked bond
bonds have coupons that are adjusted according to the rate of inflation; *the principal amount may be adjusted as well*
structured notes
bonds that are based on stocks, bonds, commodities, or currencies
Collateral
general term that frequently means securities that are pledged as security for payment of debt
Two drawbacks of bearer bonds?
1. difficult to recover if they are lost or stolen 2. company does not know who owns its bonds, it cannot notify bondholders of important events
five premiums representing compensation
1. expected future inflation 2. interest rate risk 3. default risk 4. Taxability 5. Lack of liquidity
Zero Coupon Bond
A bond that makes no coupon payments and thus is initially priced at a deep discount
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; can be classified as either negative or positive covenants.
Call Provision
Allows the company to repurchase, or "call" part or all of the bond issues at stated prices over a specific period; *corporate bonds are usually callable*
Sinking Fund
An account managed by the bond trustee for early bond redemption
Why do we say bond markets may have little or no transparency
Because the bond market is almost entirely Over-the-Counter, it has historically had little or no transparency. *A financial market is transparent if it is possible to easily observe its prices and trading volume*
Level Coupon Bond
Because the coupon is constant and paid every year, the type of bond we are describing is sometimes called a ____
Deferred Call Provision
Bond call provision prohibiting the company from redeeming the bond prior to a certain date
Call Protected
Bond during period in which it cannot be redeemed by the issuer
Nominal Rates
Interest rate of return that *has not* been adjusted for inflation
Real Rates
Interest rate of return that *has* been adjusted for inflation
Yield to Maturity (YTM)
Interest rate required in the market on a bond is called the bonds ________
Maturity
Number of years until the face value is paid is called the bond's time to _______
Creditor / Lendor
Person or Firm making the loan is called _______
Bid Price
Price a dealer is willing to pay for a security
Clean Price
Price of a bond net of accrued interest; this is the price that is typically quoted
1. Equity Securities 2. Debt Securities
Securities issued by corporations may be classified roughly as ______
Municipal Notes & Bonds (munis)
State and Local governments also borrow money by selling notes and bonds, they are called _________
1. public issues 2. private issues
Two major forms of long-term debt are ____
Note
Unsecured debt, usually with a maturity of under 10 years
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 that are generically called ______
convertible bond
can be swapped for a fixed number of shares of stock anytime before maturity at the holders options
Floating-Rate bonds (floaters)
coupon payments are adjustable
More than one year
long term debt securities mature in _____
One year or less
short term debt securities mature in ______
Unfunded Debt
short-term debt is sometimes referred to as ________
real rate
the _____ on an investment is the percentage change in how much you can buy with your dollars, in other words, *the percentage change in your buying power*
nominal rate
the ______ on an investment is the percentage change in the number of dollars you have
Coupon Rate
the annual coupon divided by the face value of a bond
Bearer Form
the certificate is the basic evidence of ownership, and the corporation will 'Pay the Bearer'
Call Premium
the difference between the call price and the stated value is the _________; usually becomes smaller over time
Debenture
unsecured bond, usually with a maturity of 10 years or more
Indenture
written agreement between the corporation and its creditors; sometimes referred to as a 'Deed of Trust'