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Interest Rates and Bonds
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Terms in this set (18)
A bond priced at par
A bond where the price is equal to the face value: PV = FV
Coupon / Coupon Payment
The interest payment made to owners of a bond.
Premium Bond
A bond whose price is greater than the face value of the bond: PV > FV
Face Value / Par Value
The amount that is to be repaid at maturity. This is used in time value calculations where the Future Value = Face Value.
Discount Bond
A bond whose price is less than the face value of the bond: PV < FV
Maturity
The date when the face value of a bond must be paid to holders of the bond.
Convertible Bond
A bond that can be traded for a set number of shares of stock at the bond holder's option.
Real interest rate
The interest rate that has been adjusted for inflation...
Coupon Rate
The interest rate that determines how much the coupon payment will be: [Coupon Payment = Coupon Rate x Face Value]
Floating Rate Bond
A bond where the interest rate changes over time based on market conditions.
Yield To Maturity (YTM)
The interest rate that is earned if one holds a bond until maturity (and it doesn't default).
This is equivalent to the "market rate" for a bond.
Zero Coupon Bonds
Bonds that do not have a coupon payment; they are sold at a discount to face value (PV < FV).
YTM = r + IP + MRP + DRP + LP
The yield on a bond is made up of:
real interest rate, inflation premium, maturity risk premium, default risk premium and liquidity premium
Current Yield
The annual coupon payment for a bond divided by the current price of a bond.
Bond Calculations - TVM
PV = Price
FV = Face Value (Par Value)
N = Time to Maturity (periods)
I = YTM per period
PMT = Coupon Payment
Price of a Bond
The price of a bond is equal to the present value of all future cash flows to be received, discounted at the YTM.
Interest Rate Risk
The risk that the value of a bond will change based on a change in the market rate (YTM) for a bond.
Nominal Interest Rate
The interest rate that has NOT been adjusted for inflation
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