FIN 3320 Bonds

Bobby Merriman Finance 3320 Bonds

bond

a contract, a piece of paper, that represents a loan made by an investor to a borrower

issuer

the person borrowing the money

bond holder

the person lending the money

principal

the amount of money borrowed​

interest

compensation for lending the money (because of delay and uncertainty)​

face value

the amount borrowed, printed on the "face" (the front) of the bond​

coupon rate

the annual interest rate (the amount the borrower pays for the loan)​

coupon payment

the interest payment​

coupon frequency

how often interest is paid​

issue date

the date when the loan was made (sometimes called offering date or first settlement date)​

maturity date

the date when the loan will be repaid​, when the original amount borrowed is due

corporate bond

a bond issued by a company

Treasury bond

a bond issued by the US government

municipal bond

a bond issued by a local or state government

fixed rate bond

a bond with a set interest rate that does not change over the life of the bond

floating rate bond

a bond with an interest rate that varies over the life of the bond (usually based on a benchmark interest rate)

coupon bond

a bond that pays interest payments (coupons) to the holder

zero coupon bond

a bond that does not pay interest payments but is sold at a discount to its face value

discount bond

a bond whose price is less than its face value

premium bond

a bond whose price is more than its face value

par bond

a bond whose price is equal to its face value

investment grade bond

a bond with a credit rating indicating low risk of default

speculative grade bond

a bond with a credit rating indicating a higher risk of default

junk bond

a bond with a low credit rating, indicating high risk but potentially high returns

bond valuation formula

the present value of a bond's future cash flows, which include periodic interest payments (coupons) and the face value (principal) repaid at maturity

price yield curve

a graph of the relationship between the value of a bond (y variable) and the yield to maturity of the bond (x variable); shows how the price of a bond changes as interest rates change​

yield to maturity (YTM)

the expected return on a bond (1) if it is held until it matures and (2) if all interest payments are reinvested at the same rate​

current yield

the annual income (interest) received from a bond divided by its current market price​

realized yield

the actual rate of return on a bond, taking into account (1) interest payments and principal (default risk), (2) reinvestment income (interest rate risk), and (3) capital gains or losses (if we sell before maturity) ​

reinvestment income

income earned from reinvesting interest payments

capital gains

the profit realized from selling an investment when the price you sold the investment at exceeds the price you originally paid for the investment

default risk

the risk that the issuer of a bond will not be able to pay back the bond's principal and/or interest payments (also known as credit risk)​

interest rate risk

the risk that the bond price or reinvestment income will change due to fluctuations in interest rates (also known as reinvestment risk)​

default premium

the amount the bond yield compensates the investor for default risk​

term premium

the amount the bond yield compensates the investor for interest rate risk​

rating agency

a company that assesses the creditworthiness of borrowers, particularly companies or governments that issue debt securities​

credit rating

a measure of how likely the borrower will be unable to repay their debt

bond market

the place where investors come together to buy and sell bonds