Chapter 7: Bonds and their Valuation
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34 terms
Terms | Definitions |
|---|---|
 bond | A long-term debt instrument |
| call provision | A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date |
| convertible bond | A bond that is exchangeable at the option of the holder for the issuing firm's common stock |
| corporate bonds | Bonds issued by corporations |
| coupon interest rate | The stated annual interest rate on a bond |
| coupon payment | The specified number of dollars of interest paid each year |
| debenture | A long-term bond that is not secured by a mortgage on specific property |
| discount bond | A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate |
| fixed-rate bond | A bond whose interest rate is fixed for its entire life |
| floating-rate bond | A bond whose interest rate fluctuates with shifts in the general level of interest rates |
| foreign bonds | Bonds issued by foreign governments or by foreign corporations |
| income bond | A bond that pays interest only if it is earned |
| indenture | A formal agreement between the issuer and the bondholders |
| indexed (purchasing power) bond | A bond that has interest payments based on an inflation index so as to protect the holder from inflation |
| interest rate (price) risk | The risk of a decline in a bond's price due to an increase in interest rates |
| investment horizon | The period of time an investor plans to hold a particular investment |
| investment-grade bond | Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds |
| junk bond | A high-risk, high-yield bond |
| maturity date | A specified date on which the par value of a bond must be repaid |
| mortgage bond | A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds |
| municipal bonds | Bonds issued by state and local governments |
| original issue discount (OID) bond | Any bond originally offered at a price below its par value |
| original maturity | The number of years to maturity at the time a bond is issued |
| par value | The face value of a bond |
| premium bond | A bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate |
| putable bond | A bond with a provision that allows its investors to sell it back to the company prior to maturity at a prearranged price |
| reinvestment rate risk | The risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested |
| sinking fund provision | A provision in a bond contract that requires the issuer to retire a portion of the bond issue each year |
| subordinated debenture | A bond having a claim on assets only after the senior debt has been paid off in the event of liquidation |
| treasury bonds | Bonds issued by the federal government, sometimes referred to as government bonds |
| warrant | A long-term option to buy a stated number of shares of common stock at a specified price |
| yield to call (YTC) | The rate of return earned on a bond when it is called before its maturity date |
| yield to maturity (YTM) | The rate of return earned on a bond if it is held to maturity |
| zero coupon bond | A bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation |
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