Bonds Important Terms
Terms in this set (11)
Face amount of the bond, which is paid at maturity (assume $1,000).
Stated interest rate (generally fixed) paid by the issuer. Multiply by par to get dollar payment of interest.
when the bond must be repaid
Yield to maturity
Rate of return earned on a bond held until maturity
Interest Rate Risk
The concern that interest rates will change, and therefore, a reduction in the value/price of a security.
Types of Bonds
-Vanilla - fixed coupons, repaid at maturity
-Zero Coupon - pay no explicit interest but instead, sell at a deep discount
-Convertible - can be converted into to stock
Below investment grade
What affects Bond prices?
The relationship between interest rates (or yields) and maturities.
A graph of the term structure
-If an issuer defaults, investors receive less than the promised return.
-Influenced by the issuer's financial strength and the terms of the bond contract.