FI312(Exam2-Bonds)
Speculative grade or junk bond
A bond rated BB or lower by Standard & Poor's, or Ba or lower by Moody's, or an unrated bond.
sinking fund
A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.
Foreign Bonds
Bonds issued by foreign governments or by foreign corporations
Eurobonds
Bonds issued in a country not in that country's currency.
investment grade bonds
Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only these kind of bonds -bonds that are issued by financially stable companies or municipalities
inverse floaters
Coupon rate falls when interest rates rise & vice versa -bonds suffer when rates rise
Puttable bonds
Give the holder an option to retire or extend the bond
forward rate
an interest rate applicable to a financial transaction that will take place in the future -the inferred short-term rate of interest for a future period that makes the expected total return of a long-term bond equal to that of rolling over short-term bonds
zero coupon bond
a bond that makes no coupon payments and is thus initially priced at a deep discount -provides only payment at par value
subordinate clause
a clause that restricts the amount of additional borrowing a firm can take
bond
a formal contract to repay borrowed money with interest at fixed intervals
bond indenture
a legal document that details all the conditions relating to a bond issue; contract between issuer and holder
Credit Default Swap
an insurance policy on the default risk of a corporate bond or loan -designed to allow lenders to buy protection against losses on large loans -later used to speculate on financial health of companies
coupon payment
an interest payment on a bond
horizon analysis
analysis of bond returns over a multiyear horizon, based on forecasts of the bond's yield to maturity and the reinvestment rate of coupons
premium bonds
bonds selling above par value
discount bonds
bonds selling below par value
convertible bonds
bonds that are exchangeable for the issuing firm's common stock
callable bonds
bonds that may be repurchased by the issuer at a specified call price during the call period
floating rate bonds
bonds with coupon rates periodically reset according to a specified market rate
realized coupon return
compound rate of return on a bond with all coupons reinvested until maturity
catastrophe bonds
corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs
t-bonds
coupon debt with original maturity > 10-30 years
t-notes
coupon debt with original maturity between 1-10 years
index bonds
coupon payments are tied to a general price index
mortgage bond
if the collateral is property
collateral trust bond
if the collateral takes the form of other securities held by the firm
accrued interest
interest revenue or expense that is recognized before cash has been exchanged
Pay-in-kind bonds
issuers can pay interest in cash or additional bonds
expected yield
must take into account possibility of a default
par/face value
official stated value of the stock; amount paid at maturity
TIPS (Treasury Inflation Protected Securities)
provide protection against inflation
collateral
something pledged as security for repayment of a loan, to be forfeited in the event of a default.
preferred stock
stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.
asset-backed bonds
the income from a specified group of assets is used to service the debt
coupon rate
the interest rate that a bond issuer will pay to a bondholder
yield to maturity
the rate of return a bondholder will receive if the bond is held to maturity (discount rate)
yield to call
the rate of return earned on a bond when it is called before its maturity date
indenture
the written agreement/contract between the corporation and the lender detailing the terms of the debt issue
true
true or false: HPR is rate of return (ROR) of particular stock; depends on market price at the end of the period
false; inversely related
true or false: bond prices rise as market interest rate rises
false; longer
true or false: bonds with shorter maturities are more sensitive to fluctuations in IR
true
true or false: interest rate fluctuations are the primary source of bond market risk
reinvestment rate risk
uncertainty surrounding the cumulative future value of reinvested bond coupon payments
debenture
unsecured bond; not backed by collateral
1. coverage ratios 2. leverage ratios/debt-to-equity ratio 3. liquidity ratio 4. profitability ratio 5. cash flow to debt ratio
what are the 5 determinants of bond safety?
promise or stated yield
will be realized only if the firm meets the obligations of the bond issue; maximum possible yield to maturity of the bond