Chapter 4 Flashcards
Cash Flows
cash payments to the holder of a security
Consol or Perpetuity
a perpetual bond with no maturity date and no repayment of principal that periodically makes fixed coupon payments
Coupon Bond
a credit market instrument that pays the owner a fixed interest payment every year until the maturity date, when a specified final amount is repaid
Coupon Rate
the dollar amount of the yearly coupon payment expressed as a percentage of the face value of a coupon bond
Current Yield
an approximation of the yield to maturity that equals the yearly coupon payment divided by the price of a coupon bond
Discount Bond (Zero-Coupon Bond)
a credit market instrument that is bought at a price below its face value and whose face value is repaid at the maturity date; it does not make any interest payments
Face Value (Par Value)
a specified final amount paid o the owner of a coupon bond at the maturity date
Fixed-Payment Loan (Fully Amortized Loan)
a credit market instrument that provides a borrower with an amount of money that is repaid by making a fixed payment periodically (usually monthly) for a set number of years
Indexed Bond
a bond whose interest and principal payments are adjusted for changes in the price level, and whose interest rate thus provides a direct measure of a real interest rate
Interest-Rate Risk
the possible reduction in returns associated with changes in interest rates
Nominal Interest Rate
an interest rate that does not take inflation into account
Present Discounted Value
today’s value of a payment to be received in the future when the interest rate is i; also called Present Value
Present Value (Present Discounted Value)
today’s value of a payment to be received in the future when the interest rate is i
Rate of Capital Gain
the change in a security’s price relative to the initial purchase price
Real Interest Rate
the interest rate adjusted for expected changes in the price level (inflation) so that it more accurately reflects the true cost of borrowing
