Chapter 7- Interest Rates and Bond Valuation
Zero Coupon Bond
A bond that makes no coupon payments and is thus initially priced at a deep discount.
Call-Protected Bond
A bond that, during a certain period, cannot be redeemed by the issuer.
Current Yield
A bond's annual coupon divided by its price.
Deferred Call Provision
A call provision prohibiting the company from redeeming a bond prior to a certain date.
Protective Covenant
A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest.
Treasury Yield Curve
A plot of the yields on Treasury notes and bonds relative to maturity.
Sinking Fund
An account managed by the bond trustee for early bond redemption.
Call Provision
An agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity.
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 rate 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.
Bond Value =
Present value of the coupons + present value of the face amount.
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 of a bond.
Interest Rate Risk Premium
The compensation investors demand for bearing interest rate risk.
Bid-Ask 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.
Liquidity Premium
The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.
Default Risk Premium
The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.
Taxability Premium
The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.
Inflation Premium
The portion of a nominal interest rate that represents compensation for expected future inflation.
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.
Face Value
The principal amount of a bond that is repaid at the end of the term. (Also called par value.)
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.
Maturity
The specified date on which the principal amount of a bond is paid.
Coupon
The stated interest payment made on a bond.
Indenture
The written agreement between the corporation and the lender detailing the terms of the debt issue.
