FRL 300 Chapter 7
all other things being equal, the lower the coupon rate, the ____ the interest rate risk
greater
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
bearer form
longer term issues( longer than 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
bonds
the principal amount of a bond that is repaid at the end of the term. Also called par value
face value
all things being equal, the longer the time to maturity, the ____ the interest rate risk
greater
the written agreement between the corporation and the leader detailing the terms of the debt issue
indenture
the portion of a nominal interest rate that represents compensation for expected future inflation
inflation premium
a bond is normally an ___ only loan
interest
the compensation investors demand for bearing interest rate risk
interest rate risk premium
the bond with the higher coupon has a _____ cash flow early in its life, so its value is less sensitive
larger
when the government wishes to borrow money for more than one year, it sells what are known as ____ bonds
Treasury
the amount by which the call price exceeds the par value of a bond
call premium
an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity
call provision
a bond that, during a certain period, cannot be redeemed by the issuer
call-protected
the reason the current yield is too low is that it considers only the _____ portion of your return; it doesn't consider the built-in gain from the price discount
coupon
the stated interest payment made on a bond
coupon
where term structure is based on pure discount bonds, the yield curve is based on ____ bond yields
coupon
the person or firm making the loan
creditor, lender
the annual coupon divided by the face value of a bond
coupon rate
bond value= present value of _____ + present value of the ____ ____
coupons, face amount
Debt is not an ownership interest in the firm. ______ generally do not have voting power
creditors
a bond's annual coupon divided by its price
current yield
an unsecured debt, usually with a maturity of 10 years or more
debenture
equity holders are paid after ___ holders
debt
the corporation's payment of interest on _____ is considered a cost of doing business and is fully tax deductible.
debt
the corporation borrowing the money is called the
debtor, borrower
when interest rates rise, the PV of the bond's remaining CF's ______, and the bond is worth less. When interest rates fall, the bond is worth _____
decline, more
the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
default risk premium
a call provision prohibiting the company from redeeming a bond prior to a certain date
deferred call provision
bond selling for less than face value
discount
As a general rule, _______ represents an ownership interest, and it is a residual claim.
equity
one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when ____ is issued
equity
Unpaid debt is a ____ of the firm. If it is not paid, the creditors can legally claim the assets of the firm.
liability
the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
liquidity premium
the specified date on which the principal amount of a bond is paid
maturity
state and local governments also borrow money by selling notes and bonds, they are called
munis
these are very attractive to high-income, high tax-bracket investors
munis
these have coupons that are exempt from federal income taxes though not necessarily state income taxes
munis
these have varying degrees of default risk, and are rated much like corporate issues
munis
the term structure of interest rates tells us what _____ interest rates are on default-free, pure discount bonds of all maturities.
nominal
interest rates or rates of return that have not been adjusted for inflation
nominal rates
an unsecured debt, usually with a maturity under 10 years
note
issues with an original maturity of 10 years or less are often called
notes
bond prices and interest rates always move in ____ directions
opposite
bond selling for more than face value
premium
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
protective covenant
interest rates or rates of return that have been adjusted for inflation
real rates
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
registered bond
an account managed by the bond trustee for the purpose of repaying the bonds
sinking fund
early repayment in some form is more typical and is often handled through a
sinking fund
the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
taxability premium
the relationship between short and long term interest rates is known as the
term structure of interest rates
treasury yields depend on the three components that underlie the term structure-
the real rate, expected future inflation, and the interest rate risk premium
a plot of the yields on Treasury notes and bonds relative to maturity
treasury yield curve
when long term rates are higher than short term rates, we say the term structure is ____ sloping; when short term rates are higher, we say it is _______ sloping.
upward, downward
the rate required in the market on a bond
yield to maturity
a bond that makes no coupon payments and is thus initially priced at a deep discount
zero coupon bond
