Chapter 7 - Interest Rates & Bonds
Warrant
A warrant gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price.
Coupon Rate
The annual coupon divided by the face value of a bond
Coupon
The stated interest payment made on a bond
call protected bond
a bond that during a certain period cannot be redeemed by the issuer
Zero coupon Bonds
a bond that pays no coupons at all must be offered at a price that is much lower than its stated value.
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
put bond
allows holder to force the issuer to buy back the bond at a stated price.
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.
current yield
bonds annual coupon divided by its price
convertible bond
can be swapped for shares of stock
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
Income bonds
similiar to conventional bonds, except that coupon payments depend on the company income. coupons are paid to the bondholder only if the firms income is sufficient.
call premium
the amount by which the call price exceeds the par value of a bond
interest rate risk premium
the compensation investors demand for bearing interest rate risk
floating rate bond
the coupon payment is adjustable. the adjustments are tied to an interest rate index such as the treasury bill interest rate.
bid-ask spread
the difference between the bid price and the asked price
bearer form
the form of bond issue in which bond is issued without record of the owners 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.
default risk premium
the portion of a nominal interest rate or bon yield that represents compensation for the possibility of default.
liquidity premium
the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.
taxability premium
the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.
inflation premium
the portion of 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 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 bond net of accrued interest this is the price that is quoted.
Face Value
the principal amount of a bond that is repaid at the end of the term - aka par value
(YTM) Yield to Maturity
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.
indenture
the written agreement between the corporation and the lender detailing the terms of the debt issue.
