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interest rate

the compensation paid by the borrower of funds to the lender; from the borrower's point of view, the cost of borrowing funds

required return

the cost of funds obtained by selling an ownership interest; it reflects the funds supplier's level of expected return

liquidity preferences

general preferences of investors for shorter-term securities

real rate of interest

the rate that creates an equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders are indifferent to the term of loans or investments because they no liquidity preference, and where all outcomes are certain

risk free rate

the required return on a risk free asset, typically a 3 month treasury bill

yield to maturity

compound annual rate of return earned on a debt security purchased on a given day and held to maturity

yield curve

a graph of the relationship between the debt's remaining time to maturity and its yield to maturity for debts of equal quality and different maturities

inverted yield curve

a downward-sloping yield curve that indicates generally cheaper long term borrowing costs than short term borrowing costs

normal yield curve

an upward sloping curve that indicates generally cheaper short term borrowing costs than long term borrowing costs

risk premium

the amount by which the interest rate or required return on a security exceeds the risk free rate of interest RF; it varies with specific issuer and issue characteristics

coupon interest rate

the percentage of a bond's par value that will be paid annually, typically in two equal semiannual payments, as interest

bond indenture

a legal document that specifies bot the rights of the bondholders and the duties of the issuing corporation

sinking fund requirement

a restrictive provision often included in a bond indenture, providing for the systematic retirement of bonds prior to their maturity


a paid individual, corporation, or commercial bank trust department that acts as the third party to a bond indenture and can take specified actions on behalf of the bondholders if the terms of the indenture are violated

conversion feature

a feature of convertible bonds that allows bondholders to change each bond into a stated number of shares of common stock

call price

the stated price at which a bond may be repurchased, by us of a call feature, prior to maturity

call premium

the amount by which a bond's call price exceeds its par value

current yield (equation)

annual payment/'current price or bond (po)


the amount by which a bond sells at a value that is less than its par value


the amount by which a bond sells at a value that greater than its par value


the rate of return that investors earn if they buy a bond at a specific price and hold it until maturity

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