Unit 8

junk bonds

-pay a high rate of interest -rated below the investment grade bonds -have a high probability of default

more risk

10 year over 5 year

bonds coupon payment

a fixed amount of interest that is paid annually or semiannually by issuer to its bondholders

not a diff between debt and equity

equity is publicly traded while debt is not

debenture

false

limitation of bond ratings

focus exclusively on default risk

treasury yield

it shows the yield for different maturities of treasury notes and bonds

inflation premium

it si the additional return demanded by investors to compensate for expected inflation

bonds time to maturity as the years go by?

it will decline

unsecured forms of debt

notes & debentures

equity represents an ____ interest of the firm while the debt is ____ an owner ship interest in the firm

ownership, not

floating-rate bonds coupon adjusts

with a lag to some base rate

ABC= 1million +6% annual coupon bonds that mature in 10 years. face value - 1,000 per bond

$60 in interest rates at the end of each year for 10 years and 1000 payment at principal at the end of 10 years

corporate yield to maturity

-YTM is the prevailing market interest rate for bonds with similar features -YTM is the expected return for an investor who buys the bodn today and holds it to maturity

a corporate bond's yield to maturity

-changes over time -is usually not the same as a bond's coupon rate

key difference between interest payments and dividend payments is

-interest is tax deductible -dividends are not tax deductible

terms refer to a bond

-par value -coupon rate -time to maturity

bond face value

-principal amount repaid at maturity -also known as the par face value

components that influence the treasury yield curve

-real rate of return -expected inflation -the interest rate risk premium

true of debt and equity

-the max reward for owning debt is fixed -equity represents an ownership interest

four variables required to calculate the value of a bond

-time remaining to maturity -par value -coupon rate -yeild to maturity

Us government borrows money by issuing

-treasury bonds -treasury notes

differences between us treasury bonds and corporate bonds

-treasury bonds are considered free of default while corporate bonds are exposed to default risk -treasury bonds issued by the US government while corporate bonds are issued by corporations -treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer

municipal bonds

bonds issued by state or local governments

crossover bond

bonds that have both an investment grade and a junk bond rating

fallen angel bonds

bonds that have dropped from investment grade to junk bond status

as investor in the bond market, why should you be concerned about changes in interest rates?

changes in interest rates cause changes in bond prices

actual bonds

convertible coco put bond

term structure of interest rates

relationship btw short term and long term interest rates

bond rating based on probability of default risk

risk the the bond issuer may not be able to make all the required payments

AAA rating

the firm is in a strong position to meet its debt obligations

included in a bonds indenture

the repayment arrangements the total amount of bonds issued

True of bonds

they are interest-only loans -they are issued by both corporations and governments

long-term debt had maturities greater than one year

true

common shapes for the term structure of interest rates

upwards sloping, downward sloping and humped

Unique features of a US federal government bond

us. treasury issues are exempt from state income taxes & issues are considered to be default-free