Invsts. chp14

coupon rate?

The coupon rate of the bond determines the interest payment: The annual payment is the coupon rate times the bond's par value

bond indenture?

The coupon rate, maturity date, and par value of the bond are part of the bond indenture , which is the contract between the issuer and the bondholder

default premium of a bond?

The default premium is the difference between the promised yield on a corporate bond and the yield of an otherwise-identical government bond that is riskless in terms of default

asset-backed bonds?

The income from a specified group of assets is used to service the debt ( e.g. coupon rates tied to the financial performance of Pulp Fiction and other films)

market conversion value?

The market conversion value is the current value of the shares for which the bonds may be exchanged

serial bonds vs sinking funds?

advantage: no uncertainty ( that a bond will be called for a sinking fund) disadvantage: bonds of different maturity dates are not interchangeable -> less liquidity

bond convexivity?

figure 14.3 increase in the interest rate results in a price decline that is smaller than the price gain resulting from a decrease of equal magnitude in the interest rate

straight vs callable bond graph?

figure 14.4

discriminant analysis?

figure 14.9 determines the equation of the line that best separates the X and O observations. x= bankrupt O= solvent

the present value of $1 annuity that lasts for T periods? ( T period annuity)

equation ( end of page 452)

bond value?

equation 14.1 present value of coupons + present value of par value

price of a bond formula?

equation 14.2

bond accrued interest formula?

equation page 447

Z score forumula?

equation page 472

PV factor?

equation top of 453 present value of a single payment of $1 to be received in T periods.

in bankruptcy, claims of securities?

1. bond holders 2.prefered stock holders 3.common stock holders

ratios used to evaluated bond safety?

1. coverage ratio (Ratios of company earnings to fixed costs) 2.leverage ration, deb-to-equity ratio (-high leverage ratio indicates excessive indebtedness) 3.liquidity ratio 4.profitability ratio 5.cash-flow to debt ratio

Baa or and above bonds are considered ............... whereas lower rated bonds are considered ..................

1. investment-grade bonds 2.speculative-grade or junk bonds

sinking bond call vs. conventional bond call?

1. the firm can repurchase only a limited fraction of the bond issue at the sinking fund call price 2. while callable bonds generally have call prices above par value, the sinking fund call price usually is set at the bond's par value

coupon payment?

A typical coupon bond obligates the issuer to make semiannual payments of interest to the bondholder for the life of the bond

floating-rate bonds?

Bonds Floating-rate bonds make interest payments that are tied to some measure of current market rates. For example, the rate might be adjusted annually to the current T-bill rate plus 2%.

indexed bonds?

Bonds Indexed bonds make payments that are tied to a general price index or the price of a particular commodity

sinking fund?

Bonds call for the payment of par value at the end of the bond's life. This payment constitutes a large cash commitment for the issuer. To help ensure the commitment does not create a cash flow crisis, the firm agrees to establish a sinking fund to spread the payment burden over several years. The

deferred callable bonds?

Callable bonds typically come with a period of call protection, an initial time during which the bonds are not callable. Such bonds are referred to as deferred callable bonds.

CDO

Collateralized debt obligations, buy and later resell a portfolio of bonds or other loans. These loans are first pooled together and then split into a series of classes known as tranches. ( Tranche is the French word for "slice.") Each tranche is given a different level of seniority in terms of its claims on the underlying loan pool, and each can be sold as a stand-alone security

discount bonds

For discount bonds (bonds selling below par value) reverse of premium bonds

premium bonds?

For premium bonds (bonds selling above par value), coupon rate is greater than current yield which is in turn greater than yield to maturity

horizon analysis?

Forecasting the realized compound yield over various holding periods or investment horizons is called horizon analysis .

catastrophe bonds?

Investors in these bonds receive compensation for taking on the risk in the form of higher coupon rates. But in the event of a catastrophe, the bondholders will give up all or part of their investments

risk structure of interest rate?

The pattern of default premiums offered on risky bonds is sometimes called the risk structure of interest rates (greater the default risk, the higher the default premium.)

yield to maturity?

The yield to maturity (YTM) is defined as the interest rate that makes the present value of a bond's payments equal to its price. This interest rate is often interpreted as a measure of the average rate of return that will be earned on a bond if it is bought now and held until maturity

inverse floater bonds?

These are similar to the floating-rate bonds we described earlier, except that the coupon rate on these bonds falls when the general level of interest rates rises. ( bet on falling interest rates)

subordination clause in a bond?

To prevent firms from harming bondholders, subordination clauses restrict the amount of additional borrowing that a firm can have

puttable bonds?

While the callable bond gives the issuer the option to extend or retire the bond at the call date, the extendable or put bond gives this option to the bondholder

yield to maturity and holding period return?

Yield to maturity can be interpreted as a measure of the average rate of return if the investment in the bond is held until the bond matures ( can be calculated cuz all parameters are known) holding-period return is the rate of return over a particular investment period and depends on the market price of the bond at the end of that holding period ( which is not known)

real rate of return on a bond?

[(1 + nominal return) /( 1 + inflation) ] - 1

bond indenture?

a bond is issued with an indenture, which is the contract between the issuer and the bondholder

collateral for bonds?

behind them. Collateral is a particular asset that the bondholders receive if the firm defaults on the bond

A ................. is a security that is issued in connection with a borrowing arrangement

bond

bond credit risk?

bond default risk

bond's current yield?

bond's annual coupon payment divided by the bond price.

mortgage bond?

bond's collateral is property

debenture bonds?

bonds that are unsecured, meaning they do not provide for specific collateral. ( less safe compared to collateral bonds)

callable bonds?

bonds that can be redeemed by the issuer ( can buy the back)

collateral trust bond?

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

CDS

credit default swap (insurance policy on the default risk of a bond or loan)

liquidity ratios?

current ratio: current assets/current liabilities quick ratio: current assets excluding inventories/current liabilities

OID

original issue discount

Eurodollar bonds?

dollar-denominated bonds sold outside the United States (not just in Europe

types of International bonds

foreign bonds (German firm sells a dollar-denominated bond in the United States, the bond is considered a foreign bond): yakee bonds, bulldog bonds, samurai bonds eurobonds: Eurobonds are denominated in one currency, usually that of the issuer, but sold in other national markets

convertible bonds?

give bondholders an option to exchange each bond for a specified number of shares of common stock of the firm. <color red>The conversion </color> ratio is the number of shares for which each bond may be exchanged

nominal rate of return of a bond?

interest + price appreciation / initial prce

bond's conversion premium

is the excess of the bond value over its conversion value.

zero-coupon bonds?

make no coupon payments (investors receive par value at the maturity date but receive no interest payments until then: The bond has a coupon rate of zero)

bond's stated yield is ..........

maximum possible yield to maturity of the bond

refunding a bond?

retiring a high-coupon bond and issuing a newer low-coupon bond when interest rates decline

profitability ratio?

return on assets : earnings before interest and taxes divided by total assets return on equity: net income/equity

ROE

return on equity

preferred stock vs bonds?

similarity: both pay dividend diff: the failure to pay the promised dividend of preferred stock does not result in corporate bankruptcy -> interest accumulates

sale of a bond equals the price of ........... plus ............

stated price ( flat price) + accrued interest

SIV

structured investment vehicle An SIV raises funds, often by issuing shortterm commercial paper, and uses the proceeds to buy corporate bonds or other forms of debt (mortgage or credit card)

As a general rule, keeping all other factors the same, the longer the maturity of the bond, ....................... the sensitivity of price to fluctuations in the interest rate

the greater

cash flow to debt ratio?

total cash flow / outstanding debt

TIPS

treasury inflation protected securities

serial bond issue?

which the firm sells bonds with staggered maturity dates (mature sequentially)