interest rate
cost of using money
real rate of interest
return required by an investor for delaying consumption. Nominal int rate minus the inflation rate.
interest rate
real rate of interest, inflation premium, default risk premium, liquidity premium, maturity risk premium.
risk free rate
The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
Term structure of interest rates
The relationship between yield to maturity and time to maturity among bonds having similar risk.
yield curve
plots interest rates against time to maturity.
upward
typically yield cuves slope
expected inflation, liquidity preference, interest rate risk
Factors that affect the shape of the yield curve
PV of expected cash flows
Value of any asset
bond
a long-term debt instrument. the borrower (corporation) agrees to make payments of interest and principal on specific dates to the holders of the bond.
bond indenture
a legal document that spells out all of the terms and conditions of the bond.
Bond sinking fund
provision in bond indenture that requires the bond issuer to retire a portion of the bond issue each year
call provision
condition in the bond indenture that gives the issuer the right to redeem bonds under pre-specified terms before the normal maturity date.
bond rating
an evaluation by a rating company of the probability that a particular bond issue will default
par value
the same as face amount.
coupon interest rate
the stated annual interest rate on a bond.
maturity date
the date on which a financial obligation must be repaid
interest rate risk
The risk that changes in market interest rates will cause fluctuations in a bond's price. Also, the risk of suffering losses as a result of unanticipated changes in market interest rates.
yield to maturity
The rate required in the market on a bond
current yield
the coupon interest payment divided by the current market price of the bonds.
corporate bond
certificate indicating that a corporation has borrowed a certain amount of money from an institution or an individual and promises to repay it in the future under clearly defined terms.
municipal bond
a bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks and schools
u.s. government bond
Short-term IOUs issued by the U.S. Treasury; considered the risk-free asset.