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Bonds Important Terms
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Terms in this set (11)
Par value
Face amount of the bond, which is paid at maturity (assume $1,000).
Coupon rate
Stated interest rate (generally fixed) paid by the issuer. Multiply by par to get dollar payment of interest.
Maturity date
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
Junk Bonds
Below investment grade
What affects Bond prices?
-Risk
-Interest rates
Term structure
The relationship between interest rates (or yields) and maturities.
Yield Curve
A graph of the term structure
Default risk
-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.
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