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Finance 3113 - Chp 6 - Bonds (Debt)
Terms in this set (66)
a loan to a firm, government, or individual.
the amount owed to the lender, that must be repaid at some point during the life of the debt.
Face Value, Principal Value, Maturity Value
are all the same. The amount owed.
when the market value of debt is the same as it's face value.
securities that sell for less than par value when issued.
the date that the principal value is due.
debt with maturities of one year or less.
Treasury Bills (T-bills)
discounted short-term debt instruments issues by the US government.
an arrangement where one firm sells some of its financial assets to another firm with the promise to repurchase the securities at a higher price at a later date. Usually overnight.
overnight loans from one bank to another.
like a postdated check or time draft. An instrument issued by a bank that obligates that bank to pay a specified amount to the owner of the banker's acceptance at some future date, usually 180 days or less. Does not pay interest.
is a type of promissory note, or IOU, issued by large, financially sound firms. Sold at a discount and no interest paid. Usually $100,000 or more.
Certificate of Deposit
an interest-earning time deposit at a bank or other financial intermediary. Generally earn periodic interest and there is a penalty for liquidating early.
can be traded to other investors prior to maturity date; they are redeemed by whoever owns them at maturity.
a deposit in a foreign bank that is not converted into the currency of the county; instead it is dominated in US dollars.
Money Market Mutual Funds
are investment funds that are pooled and managed by firms that specialize in investing funds for others for short-term financial assets.
maturities of over one year.
a loan, generally obtained from a bank or insurance company, on which the borrower agrees to make a series of payments consisting of interest and principal.
a long-term debt instrument.
the total interest paid each year, stated as a percentage of the bond's face value.
debt issued by federal, state, or local governments.
bonds issued by state or local governments. Often referred to as "Munis" and generally, the income earned is exempt from federal taxes.
a municipal bond used to raise funds for projects that generate revenues, which contribute to payment of interest and the repayment of the debt.
General Obligation Bond
a municipal bond backed by the government's ability to tax its citizens.
long-term debt instruments issued by corporations.
a bond backed by fixed assets. Foreclosure can happen in bonds default.
Senior vs. Junior Mortgage Bonds
Junior bonds secured by the same fixed assets as Senior bonds, and hold claim against the property, but have to wait until all Senior bonds have been paid in full.
an unsecured bond; long-term debt not secured by a mortgage on specific property. A strong company or by a company that does not hold physical assets to mortgage.
a bond that has claim on assets only after the senior debt has been paid off in the event of liquidation.
a bond that only pays interest when the firm has enough income to cover the payments. "riskier" than other bonds.
bonds that can be turned in and exchanged for cash at the bondholder's option. Usually only exercised when the firm takes some specified action (being acquired by a weaker company or increasing its outstanding debt by a large amount.)
Indexed (Purchasing Power) Bond
a bond that has interested payments based on an inflation index to protect the holder from inflation.
similar to Indexed Bonds, but their coupon rate "float" with market interest rates rather than the inflation rate.
Zero Coupon Bond
a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation.
a high-risk, high-yield bond used to finance mergers, leveraged buyouts, and troubled companies.
contract between the bond issuer and the bondholders; identifies the parties' rights and obligations.
an official who ensures that the bondholders' interests are protected and that the terms of the indenture are carried out.
a provision in a debt contract that constrains the actions of the borrower.
a provision that gives the issuing firm the right to call the bonds for redemption prior to maturity.
the additional amount the issuing firm has to pay over par value to call the bonds. Typically equals one year's interest.
bonds that aren't allowed to be called until 5-10 years after their initial issue.
a provision that facilitates the orderly retirement of a bond issue by retiring a portion each year.
permits bondholders to exchange their investments for a fixed number of shares of common stock.
Investment Grade Bonds
a bond rated A or BBB; they are the lowest rated bonds that many banks and other institutional investors are permitted by law to allow.
Changes in Ratings
changes affect a firm's bond ratings and it's ability to borrow long-term capital.
debt issued by a foreign borrower but denominated in the currency in which the debt was sold. Bell Canada in a US Bank with US funds.
debt issued in a country other than the one whose currency is the debt being denominated.
Type of Eurobonds
1. Yankee Bonds - issued in the US.
2. Samurai Bonds - issued in Japan.
3. Bulldog Bonds - issued in the UK.
Types of Eurodebt
2. Euro-commerical paper (Euro-CP)
Bank loans denominated in the currency of a country other than where the lending is located.
London InterBank Offer Rate; interest rate offered by the best London banks on deposits of other large, very creditworthy banks.
short-term debt instrument issued by corporations in Europe. Euro-CP
medium-term debt, 1 to 10 years, principal is paid at maturity, and interest usually paid semiannually.
A Bond's Market Price is
determined by the cash flows that it generates; interest and the principal amount that must be repaid.
Yield to Maturity
the average rate of return earned on a bond if it is held to maturity. Solve for I/Y.
Yield to Call
average rate of return earned on a bond if it is held until the first call date. Use the call price for the FV.
Relationship of Market Rate to Coupon Rate
r = c, => Bond is at Par
r > c, => Bond sells at Discount
r < c, => Bond sells at Premium
a bond that sells below its par value. When r > c.
a bond that sells above its par value. When r < c.
Interest (Current) Yield
the interest payment divided by the market price of the bond. Interest / V (beg)
Capital Gains Yield
percentage change int he market price of a bond over some period of time. V (end) - V (beg) / V (beg)
As a Premium Bond Matures
the market price depreciates to par value.
As a Discount Bond Matures
the market price appreciates to par value.
Bond Values with Semi-annual Compounding
n x 2 = N
Int / 2 = I/Y
Pmt /2 = PMT
Interest Rate Price Risk
the risk of changes in bond prices to which investors are exposed due to changing interest rates. Long-term bonds affected most.
Interest Rate Reinvestment Risk
the risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates. Short-term bonds affected most.
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