MGT 181 _Chapter 7
Zero Coupon Bonds
A bond that makes no coupon payments and is thus initially priced at a deep discount
Par Value bond
A bond that sells for its par value
Yield To Maturity
The interest rate required in the market on a bond , market interest rate
Face Value / Par Value
The principal amount of a bond that is repaid at the end of the term
call-protected bond
a bond that cannot be redeemed by the issuer
deferred call provision
a call provision prohibiting the company from redeeming a bond prior to a certain date
blanket mortgage
all the real property owned by the company
The Call Provision
allows the company to repurchase or " call" part or all of the bond issue at stated prices over a speicifc period
sinking fund
an account managed by the bond trustee for the purpose of repaying the bonds
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
bond's annual coupon divided by its price
Debt securities are typically called notes, debentures, or ______
bonds
the person or firm making the loan is called the ______ and ______
creditor or lender
public bonds issued in the U.S by industrial and financial companies are typically ______
debentures
One reason that corporating try to create a debt security that is really equity is to obtain the______ benefits and the ______ benefits
debt, bankruptcy
thecorporation borrowing the money is called the ______ and ______
debtor borrower
When interest rates rise, the present value of the bond's remaining cash flows ______, and the bond is worth ______
declines, less
the corporation's payment of interest on debt is fully tax ______
deductible
U.S Treasury issues have no______risk because the Treasury can always com up with the money to make the payments
default
bond ratings are concerned only with the possibility of ______
default
when short-term rates are higher, we say it is ______ sloping
downward
longer-term bonds have greater interest rate sensitivity because a large portion of a bond's present value come from the ______
face value and its coupon
The value of the bond will ______
fluctuate.
Collateral
general term that frequently means securities that are pledged as security for payment of "debt"
All other things being equal, the longer the time to maturity, the ______ the interest rate risk.
greater
All other things being equal, the lower the coupon rate, the ______ the interest rate risk
greater
for a premium bond, current yield would be _____ than the yield of matruity becuase it ignores the built-in loss
higher
Bond is normally an ______ loan
interest
Nominal rates
interest rates or rates
Real rates
interest rates or rates of return that have been adjusted for inflation
when interest rate declines, the bond is worth ______
more
dividends paid to stockholders are ______ tax deductible
not
seniority
preference in position over other lenders,
the nominal rate =
real rate + inflation
The Cash flows from a bond stay the ______, although the interest rates ______ in the market place
same
U.S Treasury issues are exempt from ______ _______ taxes , are only taxed at the federal level
state income
munis are exempt from ______ ______ taxes, so it is very attractive to the high-income investors
state income
Call premium
the amount by which the call price exceeds the par value of a bond
Coupon rate
the annual coupon divided by the face value
discount bond
the bond sells for less than face value
bid-asked spread
the difference between the bid price and the asked price
bearer form
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
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
Maturity
the number of years until the face value is paid
bid price
the price a dealer is willing to pay for a security
asked price
the price a dealer is willing to take for 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 a bond net of accrued interest; this is the price that is typically quoted, "quoted" price
what determines the shape of the term structure?
the real rate of interest and the rate of inflation
term structure of interest rate
the relationship between nominal interest rates on default-free, pure discount securities and time to maturity ; that is, the pure time value of money "pure" interest rates
interest rate risk
the risk that arises from fluctuating interest rates
Coupon
the stated "interest" payment made on a bond
There are two things that is linked to the sensitivity of the bond:
the time to maturity and the coupon rate
Indenture
the written agreement between the corporation and the lender detailing the terms of the debt issue
when long-term rates are higher than short-term rates, we say that the term structure is ______ sloping
upward
the price of a highly rated bond can still be quite ______
volatile
Premium bond
when a bond sells for more than face value -lower market interest rate than coupon rate