Lecture 2 and 3 Flashcards
(22 cards)
risk-free interest rate
If the cash flows are risk-less
the opportunity cost of capital
The expected return on other, “equivalently risky”, investments
Financial Asset
Contractual claim to a stream of cash flows
Financial Security
Financial asset that is tradable
Securitization
The process of making assets tradable
Bond
a debt security in which the issuer (borrower/debtor) promises to repay to the
lender/investor the amount borrowed plus interest over a specified period of time
Principal value
the amount that the issuer agrees to repay at maturity
maturity
the date the bond will cease to exist and the issuer will redeem the
bond by paying the amount owed.
term to maturity
the number of years during which the issuer has promised to meet the conditions of the obligation
Coupon
stated interest payment made on a bond
Coupon rate
annual coupon divided by the par value (face value) of a bond
Straight coupon
bond that has a fixed coupon over the bond’s maturity
Zero coupon bond
bond that makes no coupon payment. The only return investor
receives is difference between what was paid for the debt and its face value at maturity
Floating rate bond
bond where the coupon rate (and the coupon payment) is adjustable.
Security
: a debt may be unsecured or secured with the pledge of specific property. An
unsecured debt is referred to as a debenture
Seniority
indication of preference in the claim on assets and income
What determines the bond return?
The return that an investor receives from any security is based on a
comparison of the future cash flows received with the initial investment.
Yield to maturity (YTM)
the yield (rate of return, interest rate) required by the
market to invest in the bond if it were held until maturity
Discount Bond
When the YTM > the coupon rate, a bond will be valued below its
par value.
Premium Bond
When the YTM < the coupon rate, a bond will be valued above its
par value
Bond prices are subject to the effects of both:
The passage of time and changes in the interest rates
holding period
return.
If you sell the bond before it matures, your realized return is known as the holding period
return
