FIN3403_Notes_08_BondMarkets-v3

Capital Markets

Markets where long-term debt (bonds) and equity (stocks) are traded, focusing on instruments with maturities longer than one year.

Bond

A security representing debt owed by an issuer to an investor, typically involving specified payments over time.

Coupon Rate

The stated annual interest rate on a bond, usually fixed for the bond's life.

Maturity

The number of years or periods until the bond matures and the holder is paid the face amount.

Municipal Bonds

Bonds issued by local, county, and state governments to finance public interest projects, often exempt from federal tax.

Treasury Bonds

Long-term debt securities issued by the U.S. Treasury, with maturities ranging from 10 to 30 years.

Callable Bond

A bond that can be redeemed by the issuer before its maturity date.

Convertible Debt

Debt that may be converted into equity at the discretion of the bondholder.

Secured Bonds

Bonds that are tied to an asset or assets, providing bondholders with a claim to those assets if the issuer defaults.

Subordinate Bonds

Bonds that have a lower claim on the assets of the issuer and are paid only after senior bonds in bankruptcy.

Debt Rating

A rating assigned to a bond indicating its creditworthiness, ranging from high quality (investment grade) to low quality (junk).

Yield to Maturity

The total return anticipated on a bond if held until it matures, expressed as an annual rate.

Financial Guarantee

An assurance provided by a third party, typically an insurance company, to cover timely payment of interest and principal on the debt.

Covenants

Clauses in a bond agreement that protect bondholders by regulating the issuer's behavior.

TIPS

Treasury Inflation-Protected Securities that adjust the principal based on changes in the consumer price index.

Sinking Fund Provision

A requirement for issuers to set aside funds periodically to retire a portion of the debt before maturity.

Corporate Bonds

Debt securities issued by corporations to raise capital, typically paying interest semi-annually.

Junk Bonds

High-yield bonds that carry a higher risk of default and are rated below investment grade.

Indenture

The contract that accompanies a bond, specifying the terms of the loan agreement, including covenants.

Current Yield

The interest payment divided by the current market price of the bond.

Treasury Bills

Short-term securities issued by the U.S. Treasury, typically with maturities of one year or less.

Agency Debt

Bonds issued by government-sponsored entities (GSEs) that are not technically Treasury securities but have an implicit government backing.