Finance Chapter 6

Ace your homework & exams now with Quizwiz!

Face / Par Value

The amount that will be repaid at the end of the loan is called the bonds ________

Interest Rate Risk Premium

The compensation investors demand for bearing interest rate risk

Debtor / Borrower

The corporation borrowing the money is called ________

Bid-Ask Price

The difference between the two prices is called the _________ (or spread) and it represents the dealers profit

private-issue debt is directly placed with a lender

The main difference between public-issue and private-issue debt is that ___________________ and not offered to the public.

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

Inflation Premium

The portion of a nominal interest rate that represents compensation for expected future inflation

Taxability premium

The portion of the nominal interest rate or bond yield that represents compensation for unfavorable tax status

Asked Prices

The price a dealer is willing to take for a security

Dirty Price

The price of the bond included accrued interest, also known as the full or invoice price. *This is the price the buyer actually pays*

Registered Form

The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record

Fisher Effect

The relationship among nominal returns, real returns, and inflation *(1+R) = (1+r)(1+h)* R = nominal rate r = real rate h = expected inflation rate Approx: R = r + h

Term Structure of Interest Rate

The relationship between nominal interest rate on default-free, pure discount securities and time to maturity; that is, the pure time value of money

Interest Rate Risk

The risk that arises for bond owners from fluctuating interest rates is called _______

put bond

allows the holder to force the issuer to buy the bond back at a stated price

Current Yield

bond's annual coupon divided by its price

Inflation-Linked bond

bonds have coupons that are adjusted according to the rate of inflation; *the principal amount may be adjusted as well*

structured notes

bonds that are based on stocks, bonds, commodities, or currencies

Collateral

general term that frequently means securities that are pledged as security for payment of debt

Two drawbacks of bearer bonds?

1. difficult to recover if they are lost or stolen 2. company does not know who owns its bonds, it cannot notify bondholders of important events

five premiums representing compensation

1. expected future inflation 2. interest rate risk 3. default risk 4. Taxability 5. Lack of liquidity

Zero Coupon Bond

A bond that makes no coupon payments and thus is initially priced at a deep discount

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; can be classified as either negative or positive covenants.

Call Provision

Allows the company to repurchase, or "call" part or all of the bond issues at stated prices over a specific period; *corporate bonds are usually callable*

Sinking Fund

An account managed by the bond trustee for early bond redemption

Why do we say bond markets may have little or no transparency

Because the bond market is almost entirely Over-the-Counter, it has historically had little or no transparency. *A financial market is transparent if it is possible to easily observe its prices and trading volume*

Level Coupon Bond

Because the coupon is constant and paid every year, the type of bond we are describing is sometimes called a ____

Deferred Call Provision

Bond call provision prohibiting the company from redeeming the bond prior to a certain date

Call Protected

Bond during period in which it cannot be redeemed by the issuer

Nominal Rates

Interest rate of return that *has not* been adjusted for inflation

Real Rates

Interest rate of return that *has* been adjusted for inflation

Yield to Maturity (YTM)

Interest rate required in the market on a bond is called the bonds ________

Maturity

Number of years until the face value is paid is called the bond's time to _______

Creditor / Lendor

Person or Firm making the loan is called _______

Bid Price

Price a dealer is willing to pay for a security

Clean Price

Price of a bond net of accrued interest; this is the price that is typically quoted

1. Equity Securities 2. Debt Securities

Securities issued by corporations may be classified roughly as ______

Municipal Notes & Bonds (munis)

State and Local governments also borrow money by selling notes and bonds, they are called _________

1. public issues 2. private issues

Two major forms of long-term debt are ____

Note

Unsecured debt, usually with a maturity of under 10 years

Bonds

When a corporation (or government) wishes to borrow money from the public on a long-term basis, it usually does so by issuing, or selling, debt securities that are generically called ______

convertible bond

can be swapped for a fixed number of shares of stock anytime before maturity at the holders options

Floating-Rate bonds (floaters)

coupon payments are adjustable

More than one year

long term debt securities mature in _____

One year or less

short term debt securities mature in ______

Unfunded Debt

short-term debt is sometimes referred to as ________

real rate

the _____ on an investment is the percentage change in how much you can buy with your dollars, in other words, *the percentage change in your buying power*

nominal rate

the ______ on an investment is the percentage change in the number of dollars you have

Coupon Rate

the annual coupon divided by the face value of a bond

Bearer Form

the certificate is the basic evidence of ownership, and the corporation will 'Pay the Bearer'

Call Premium

the difference between the call price and the stated value is the _________; usually becomes smaller over time

Debenture

unsecured bond, usually with a maturity of 10 years or more

Indenture

written agreement between the corporation and its creditors; sometimes referred to as a 'Deed of Trust'


Related study sets

UF REL2300 World Religions Midterm Review

View Set

Chapter 35 and 36 prep u nclex questions

View Set

Chapter 4 question and answer, Chapter 5 Preble's Questions, Chapter 6 Preble's Question - Final Review

View Set

Physics Giancoli Misconceptional 8-15

View Set

2. Life Insurance Basics: Insurable Interest & Personal Uses of

View Set

Chapter 8 International Business

View Set

Block 7 Brain Sciences 1 - Marcus

View Set