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Finance, 3040 Chapter 6
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Key Concepts:
Terms in this set (15)
The coupon rate of a bond equals
A defined percentage of its face value.
Coupon Payments
Periodic receipts of interest by the bondholder are known as this.
Yield to Maturity
The discount rate that makes the present value of a bond's payments equal to its price.
Coupon rates that exceed market rates
Cause bonds to sell for a premium.
If a bond is selling at par value, the price of the bond
Will increase in the future if the yield on the bond is lower than the coupon rate.
As the time to maturity decreases
The bond price incraeses
The current yield of a bond can be calculated by
Dividing the annual coupon payment by the price.
Coupon rate is fixed
For the life of a given bond.
Convertible Bond provides the option to convert
A bond into shares of common stock
Face Value
A bond's par value can also be called this.
Expected cash flows will change
When interest rates change.
The rate of return will be higher than the yield to maturity
Relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures.
Higher than the coupon rate
If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be this.
Higher default possibilities
Investors who purchase bonds having lower credit ratings should expect this.
For a bond currently selling at a premium
Its current yield is lower than its coupon rate
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