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FIN303 Ch8

Terms in this set (16)

Coupon payments
The interest payments made to bondholders
Coupon rate
The annual coupon payment of a bond divided by the bond's face value
Discount bonds
Bonds that sell at prices below par (face) value
Effective annual yield (EAY)
The annual yield that takes compounding into account; another name for the Effective annual interest rate (EAR)
Face value, or par value
The amount on which interest is calculated and that is owed to the bondholder when a bond reaches maturity
Fixed-income securities
Debt instruments that pay interest in amounts that are fixed for the life of the contract
Interest rate risk
Uncertainty about future bond values that is caused by the unpredictability of interest rates
Investment-grade bonds
Bonds with low risk of default that are rated Baa (BBB) or above.
Noninvestment-grade bonds
Bonds rated below Baa (or BBB) by rating agencies; often called speculative-grade bonds, high-yield bonds, or junk bonds
Opportunity cost
The return from the best alternative investment with similar risk that an investor gives up when he or she makes a certain investment
Par-value bonds
Bonds that sell at par value, or face value; whenever a bond's coupon rate is equal to the market rate of interest on similar bonds, the bond will sell at par (face) value
Premium bonds
Bonds that sell at prices above par (face) value
Realized yield
For a bond, the interest rate at which the present value of the actual cash flows from a bond equals the bond's price
Term structure of interest rates
The relation between yield to maturity and term to maturity
Yield curve
A graph representing the term structure of interest rates, with the term to maturity on the horizontal axis and the yield on the vertical axis
Yield to maturity
For a bond, the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond
THIS SET IS OFTEN IN FOLDERS WITH...