2 Flashcards
(32 cards)
Term
Definition
What is a bond?
A debt security obligating the issuer to make specified payments to bondholders.
Why are bonds called fixed-income securities?
They offer fixed cash flows with a known maturity date.
What is the face value or par value of a bond?
The principal amount repaid at the end of the term.
What is the coupon rate?
The annual interest payment divided by the bond’s face value.
What is yield to maturity (YTM)?
The market-required rate of return on a bond.
What is the value of a bond?
Bond Value = PV of Face Value + PV of Annuity (Coupon Payments).
What happens when bond yield increases?
Bond value decreases.
What happens when bond yield decreases?
Bond value increases.
What is a discount bond?
A bond that sells for less than its face value.
What is a premium bond?
A bond that sells for more than its face value.
What is interest rate risk?
Risk that bond prices fall when interest rates rise.
What bonds are most sensitive to interest rate risk?
Long maturity and low coupon bonds.
What is an indenture?
A formal contract between bond issuer and bondholders.
What is a sinking fund?
An account used to repay bond principal gradually.
What is a call provision?
Allows issuer to repurchase bonds before maturity.
What are protective covenants?
Restrictions in bond contracts to protect bondholders.
What do bond ratings reflect?
The creditworthiness or default risk of the issuer.
What rating is considered investment grade?
BBB/Baa and above.
What rating is considered speculative or junk?
BB/Ba and below.
What is the nominal interest rate?
The rate not adjusted for inflation.
What is the real interest rate?
The rate adjusted for inflation.
What is the Fisher Effect formula?
1 + R = (1 + r) × (1 + h), where R = nominal, r = real, h = inflation.
What are ordinary shares?
Equity representing ownership with residual claim on profits and assets.
