finance chapter 14

fixed coupon bond

the most common type of bond, it pays a fixed interest rate and has a known maturity

indenture

a contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable and the amount of money that is to be

principal value

the amount that is repaid when the bond matures and the principal amount is due

par amount

the face value of a bond. Generally $1,000 for corporate issues, with higher denominations such as $10,000 for many government issues.

maturity value

The length of time until the principal amount of a bond must be repaid

zero coupon bond

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

fixed-rate par bond

The most popular and most widely used form of bonds issued in the primary market. Provides a coupon and interest rate that creates a market value equal to 100% at the time of pricing

fixed-rate discount bond

Popular in the municipal market. The coupon and interest rate will create a market value of less than 100% at the time of pricing

fixed-rate premium bond

Provides a coupon and interest rate that creates a market value of more than 100% at the time of pricing

asset-backed debt

Debt that is secured by an asset, also known as collateralized debt

optional redemption

The option for an issuer to redeem bonds prior to their stated maturity at a predetermined price above par value

call premium

The dollar amount over the par value of a callable fixed-income debt security that is given to holders when the security is called by the issuer

default risk

The risk that companies or individuals will be unable to pay the contractual interest or principal on their debt obligations

prepayment risk

The uncertainty related to unscheduled prepayment in excess of scheduled principal repayment

interest rate risk

The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes sually affect securities inv

spread to treasuries

The difference in all taxable, fixed-rate debt traded int he capital markets and risk-free treasury bonds

senior debt

A bond or other form of debt that takes priority over other debt securities sold by the issuer

subordinate debt

Debt that follows senior debt in line for claims on cash flows and assets upon liquidation

sinking fund redemption

the redemption schedule where bonds have a maturity dates and are subject to an annual call in accordance with a pre-specified retirement schedule

duration

it measures the weighted average maturity of a bond's cash flows. The measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all ca

yield curve

A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequent reported yield curve compares the three-month, two-year, five-year and 30-year US. treasury debt. This yiel

taxable bonds

Bonds that are subject to taxation

term structure of interest rates

Also referred to as the yield curve

pure expectations hypothesis

The yield curve is a function of expected future or forward short-term interest rates

liquidity preference hypothesis

Long term rates are composed of expected short-term rates plus a liquidity premium. most investors prefer to hold short-term bonds, so to induce them to buy long-term bonds, liquidity premiums must be offered

market segmentation hypothesis

The market is composed of investors who differ in their investment requirements. Investors want to invest so that the life of their assets matches the life of their liabilities. Investors may want short-term or long-term bonds to invest in, depending on t

preferred habitat hypothesis

also called the market segmentation hypothesis

implied forward yield curve

Expected short-term rates, which over any period will reproduce the observed market rates expressed in the current day yield curve

inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling

deflation

A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal, or investment spending. The opposite of inflation, deflation has the side effect of increased un

default premium

The additional amount a borrower must pay to compensate the lender for assuming default risk