MGT 181 _Chapter 7

Zero Coupon Bonds

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

Par Value bond

A bond that sells for its par value

Yield To Maturity

The interest rate required in the market on a bond , market interest rate

Face Value / Par Value

The principal amount of a bond that is repaid at the end of the term

call-protected bond

a bond that cannot be redeemed by the issuer

deferred call provision

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

blanket mortgage

all the real property owned by the company

The Call Provision

allows the company to repurchase or " call" part or all of the bond issue at stated prices over a speicifc period

sinking fund

an account managed by the bond trustee for the purpose of repaying the bonds

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

bond's annual coupon divided by its price

Debt securities are typically called notes, debentures, or ______

bonds

the person or firm making the loan is called the ______ and ______

creditor or lender

public bonds issued in the U.S by industrial and financial companies are typically ______

debentures

One reason that corporating try to create a debt security that is really equity is to obtain the______ benefits and the ______ benefits

debt, bankruptcy

thecorporation borrowing the money is called the ______ and ______

debtor borrower

When interest rates rise, the present value of the bond's remaining cash flows ______, and the bond is worth ______

declines, less

the corporation's payment of interest on debt is fully tax ______

deductible

U.S Treasury issues have no______risk because the Treasury can always com up with the money to make the payments

default

bond ratings are concerned only with the possibility of ______

default

when short-term rates are higher, we say it is ______ sloping

downward

longer-term bonds have greater interest rate sensitivity because a large portion of a bond's present value come from the ______

face value and its coupon

The value of the bond will ______

fluctuate.

Collateral

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

All other things being equal, the longer the time to maturity, the ______ the interest rate risk.

greater

All other things being equal, the lower the coupon rate, the ______ the interest rate risk

greater

for a premium bond, current yield would be _____ than the yield of matruity becuase it ignores the built-in loss

higher

Bond is normally an ______ loan

interest

Nominal rates

interest rates or rates

Real rates

interest rates or rates of return that have been adjusted for inflation

when interest rate declines, the bond is worth ______

more

dividends paid to stockholders are ______ tax deductible

not

seniority

preference in position over other lenders,

the nominal rate =

real rate + inflation

The Cash flows from a bond stay the ______, although the interest rates ______ in the market place

same

U.S Treasury issues are exempt from ______ _______ taxes , are only taxed at the federal level

state income

munis are exempt from ______ ______ taxes, so it is very attractive to the high-income investors

state income

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

discount bond

the bond sells for less than face value

bid-asked 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

Maturity

the number of years until the face value is paid

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, "quoted" price

what determines the shape of the term structure?

the real rate of interest and the rate of inflation

term structure of interest rate

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

interest rate risk

the risk that arises from fluctuating interest rates

Coupon

the stated "interest" payment made on a bond

There are two things that is linked to the sensitivity of the bond:

the time to maturity and the coupon rate

Indenture

the written agreement between the corporation and the lender detailing the terms of the debt issue

when long-term rates are higher than short-term rates, we say that the term structure is ______ sloping

upward

the price of a highly rated bond can still be quite ______

volatile

Premium bond

when a bond sells for more than face value -lower market interest rate than coupon rate