Chapter 7: Interest Rates and Bond Valuation
Coupon Rate
The annual coupon divided by the face value of a bond.
Interest Rate Risk Premium
The compensation investors demand for bearing interest rate risk.
Inflation Premium
The portion of a nominal interest rate that represents compensation for expected future inflation.
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.
Yield To Maturity (YTM)
The rate required in the market on a bond.
Term Structure of Interest Rates
The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.
Fisher Effect
The relationship between nominal returns, real returns, and inflation.
Interest Rate Risk
The risk that arises for bond owners from fluctuating interest rates
Maturity
The specified date on which the principal amount of a bond is paid
Indenture
The written agreement between the corporation and the lender detailing the terms of the debt issue
Collateral
any asset pledged on a debt
Zero Coupon Bonds
A bond that makes no coupon payments and is thus initially priced at a deep discount.
Current Yield
A bond's annual coupon divided by its price.
Debenture
An unsecured debt, usually with a maturity of 10 years or more
Note
An unsecured debt, usually with a maturity under 10 years
Real Rates
Interest rates or rates of return that have been adjusted for inflation.
Nominal Rates
Interest rates or rates of return that have not been adjusted for inflation.
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
Convertible Bond
a bond that can be swapped for a fixed number of shares of stocks anytime maturity at the holder's option
Level Coupons Bond
coupons that are constant and paid every year
Mortgage Securities
secured by a mortgage on the real property of the borrower,
Face Value
the principal amount of a bond that is repaid at the end of the term. Also called par value
Coupons
the stated interest payment made on a bond.
Debt Securities
typically called notes, debentures, or bonds
Discount Bond
when the bond selld for less than its face value