finance test2 bonds
bond rating
1) triple-a/ AAA- highest quality, minimal risk, low probability of default- Johnson and Johnson and Microsoft 2) double A- high quality grade 3) single A- upper-medium 4) Baa or BBB- low-medium grade- investment grade 5) Ba1 or lower or BB or lower- high default risk, low grade 6) D is for securities in default 7) C are most likely in default
treasury bills
zero-coupon bonds, issued by the US gov, with maturity of up to 1 year
largest securities market-trading volume
US treasury market
zero-coupon bond
a bond that only makes one payment at maturity
treasury yield curve
a plot of the yields on treasury notes and bonds relative to maturity -determined by real rate of interest, expected inflation, interest rate risk- based on coupon bond yields -free of default
putability
after a certain period, the bondholder has the right to demand payment of the loan before maturity
convertibility
after a certain period, the bondholder has the right to exchange the bond for stocks of the issuer
callability- option provision
after a certain period, the issuer has the right to pay back the loan before maturity
yield
bond yield too high- bond can be undervalued bond yield too low- bond voervalued -if assume value=price, you assume markets are always efficient
current yield
bond's annual coupon/ price
coupon bonds
bonds that pay regular coupon interest payments up to maturity, when the face value is also paid
bond sensitivity*
bonds with longer maturities, more sensitive to change in interest rates bonds with lower coupons, more sensisitve to changes in interest rates
debt
borrowing of money
bond
contractual agreement between the issuer and the bondholders
coupon payment
coupon rate (face value) / number of coupon payments per yr
coupon rate
determines the amt of each coupon payment of a bond-expressed as an APR- total an ueal interest payment per dollar of face value
relationship between yield and price*
indirect- bond price inc, yield decreases
fixed- income debt
instruments contractually include predetermined payment schedules that usually include interest and prinicpal payments
real rate of interest
interest rates adjusted for inflation- rate of growth of your purchasing power -compensation investors demand
nominal rate of interest
interest rates not adjusted for inflation
protective convenant
part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect lender's interest -negative covenant- limits/prohibits actions a company might take- thou shall not -positive covenant- specifies an action the company agrees to take or a condition the company must abide by
liquidity premium
portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
default risk premium
portion of a nominal interest rate or bond yield that represents compensation for possibility of default
taxability premium
portion of nominal interest rate or bond yield that reps compensation for unfavorable taxes
par
price at which a coupon bond trades that is equal to the face value
discount
price at which bonds trade is less than their face value
premium
price at which coupon bonds trade that is greater than their face value
credit risk
risk of default, bonds cash flows are not known with certainty -yield to maturity with bonds with more credit risk are higher
term
short- less than 1 yr- T-bills long- more than one year -t-notes- 1-10, t-bonds, more than 10m corporate bonds, consols
bond certificate
states the terms of a bond as well as the amounts and dates of all payments to be made- notes, bonds, asset back securities
interest rate risk premium
the compensation investors demand for bearing interest rate risk -long term bonds- more risky- investors demand compensation for risk in form of higher rates
maturity date
the final repayment date of a bond
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 the record
face value/par value/principal amount
the notional amount of a bond used to compute its interest payments- due at the bond's maturity
inflation premium
the portion of a nominal interest rate that represents compensation for expected future inflation -if inflation rights higher in future, long-term nominal interest rates will be higher than short-term rates
inflation premium
the portion of a nominal interest rate that represents compensation for expected future inflation- if inflation higher- long term nom interest rates are higher than short-term -upward-sloping structure may mean higher inflation
coupons
the promised interest payments of a bond, paid periodically until the maturity date of a bond
yield to maturity/yield*
the rate of return of an investment in abond that is held to its maturity date or the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond
fisher effect
the relationship among nominal returns, real returns, and inflation nominal rate= (1+ real rate) x (1+inflation rate) -1
credit risk*
the risk of default!!! by the issuer of any bond that is not default free- bonds cash flows are not certain -may default, risk free
term/tenor
the time remaining until the bond's maturity date
indenture
the written agreement between the corporation and the lender detailing the debt issue- includes provisions
treasury bonds
type of us treasury coupon security, currently traded in financial markets, with original maturities 10+ years
treasury notes
type of us treasury coupon security, currently traded in financial markets, with original maturities from 1-10 years
debenture
unsecured debt
risk-free
us treasury securities are widely regarded to be risk-free because there is virtually no chance the government will fail to pay the interest and default on the bonds -risk-free interest rate= closest proxy we hae is the rate on us treasuries
bond issuers
us treasury/government states, municipalties, agencies corporations foreign government (sovereign bobds)