Chapter 6 Vocab - Bonds and Bond Valuation

Zero-Coupon Bond

A bond that paid zero coupons.

Bond

A long-term debt instrument by which a borrower of funds agrees to pay back the funds (the principal) with interest on specific dates in the future.

Treasury Bill

A short-term borrowing instrument with a maturity of less than one year.

Treasury Notes

A type of bond with a maturity of between two year and ten years.

Treasury Bonds

A type of bond with maturity of more than ten years

Junk Bond

Bonds with a rating below Baa3 or BBB- in regards to have a perceived higher default risk.

Current Yield

The annual coupon payment divided by the current price.

Yield to Maturity

The rate of return that the bondholder will receive at the current price if the investor holds the bond to maturity.

Discount Bond

When the coupon rate is less than the yield to maturity, the bond sells for a discount against its par value. That is, the price of the bond is less than the par value.

Premium Bond

When the coupon rate is more than the yield to maturity, the bond sells for a premium above its par value.

Par Value Bond

When the yield to maturity and coupon rate are the same, the bond sells for its par value.

Separate Trading of Registered Interest and Principal (STRIPS)

Which are fixed-income securities that sell at a significant discount to face value and offer no interest payments before they mature at par.