Chapter 7 -Intrest Rates and Bonds

Question 1

Coupon

Answer 1

Stated interest payment made on a bond

Question 2

Level coupon bond

Answer 2

constant and paid every year

Question 3

face or par value

Answer 3

amount paid at end of loan

Question 4

coupon rate

Answer 4

annual coupon/face value

Question 5

time to maturity

Answer 5

of years until it is paid

Question 6

Interest rate

Answer 6

when rates rise- pv of bonds remaining cash flow declines

when rates fall- bond is worth more

Question 7

Yield to Maturity or yield

Answer 7

rate required in market on bond

Question 8

discounted bond

Answer 8

less than face value

Question 9

Interest rate risk

Answer 9

time to maturity and coupon rate -two factors
higher coupon has larger cash flow earlier so less sensitive
longer the time greater risk

Question 10

price of bond

Answer 10

annuity sum + lump sum

Question 11

current yield

Answer 11

bonds annual coupon/price- %

doesn’t consider built-in gain from the price discount

Question 12

interest rate affects

Answer 12

market value

Question 13

debt securities

Answer 13

note debentures bonds

Question 14

indenture or deed of trust

Answer 14

written agreement between corp and lender detailing the terms of debt issue

Question 15

items in indenture

Answer 15

term 
total amount 
description of prop used as security
repayment arrangements
call provisions
details of protective covenants

Question 16

debenture

Answer 16

unsecured bond -

Question 17

sinking fund

Answer 17

account for early bond payment

Question 18

call provision

Answer 18

agreement giving corp option to repurchase bond a specified price prior to maturity
usually above value - difference= call premium

Question 19

protective covenants

Answer 19

part of indenture that limits actions of company during life of the loan

Question 20

Bond ratings

Answer 20

concerned only with possibility of default

do not address interest risk