chapter 7 interest rates and bond evaluation

These flashcards provide essential vocabulary and definitions related to interest rates and bond valuation from the lecture notes.

Bond

A debt security used by corporations or governments to borrow money from the public.

Coupon

The stated interest payment made on a bond.

Face Value (Par Value)

The principal amount of a bond that is repaid at the end of the term.

Maturity

The specified date on which the principal amount of a bond is paid.

Yield to Maturity (YTM)

The rate required in the market on a bond if it is bought and held until maturity.

Discount Bond

A bond that sells for less than its face value.

Premium Bond

A bond that sells for more than its face value.

Current Yield

The bond’s annual coupon divided by its price, indicating only the coupon return.

Indenture

The written agreement detailing the terms of a debt issue between the corporation and the lender.

Protective Covenant

A legal agreement limiting certain actions to protect lenders' interests.

Junk Bond

A bond that is rated below investment grade, indicating a higher risk of default.

Nominal Rate

The interest rate that has not been adjusted for inflation.

Real Rate

The interest rate that has been adjusted for inflation.

Fisher Effect

Describes the relationship between nominal returns, real returns, and inflation.

Term Structure of Interest Rates

The relationship between nominal interest rates and time to maturity of bonds.

Treasury Yield Curve

A plot of yields on Treasury notes and bonds relative to their maturities.

Floating-Rate Bond

A bond with coupon payments that are adjustable based on an interest rate index.

Zero Coupon Bond

A bond that does not make periodic coupon payments and is sold at a discount.

Taxable vs. Municipal Bonds

Comparative analysis of bond yields based on tax implications for investors.

Accrued Interest

Interest that accumulates on a bond between coupon payments.

Bid-Ask Spread

The difference between the price a dealer is willing to pay (bid) and the price a dealer is willing to accept (ask) for a security.