Bond Prices and Yields - Chapter 10

This array of flashcards covers key terms and concepts from Chapter 10 on Bond Prices and Yields, helping in exam preparation.

What is a bond?

A security that obligates the issuer to make payments to the holder over time.

What is the face value of a bond?

The payment to the bondholder at the maturity of the bond.

What is a coupon rate?

The bond’s annual interest payment per dollar of par value.

What characterizes a zero-coupon bond?

It pays no coupons, sells at a discount, and provides only payment of par value at maturity.

How is accrued interest calculated?

Accrued interest is calculated as annual coupon payment divided by two, multiplied by days since last coupon payment and divided by days separating coupon payments.

What are callable bonds?

Bonds that may be repurchased by the issuer at a specified call price during a call period.

What is a convertible bond?

A bond that allows the bondholder to exchange the bond for a specified number of common stock shares.

Define puttable bonds.

Bonds that allow the holder to choose to exchange for par value or to extend for a given number of years.

What are floating-rate bonds?

Bonds with coupon rates that periodically reset according to specified market data.

What is preferred stock?

Equity that commonly pays a fixed dividend and is also included under the fixed-income universe.

What are international bonds?

Bonds issued by a borrower in a different country than where the bond is sold.

What are indexed bonds?

Bonds with payments tied to a general price index or the price of a particular commodity.

Calculate the value of a bond.

Bond value equals the present value of coupons plus the present par value.

What happens to bond prices when market interest rates rise?

Bond prices fall as market interest rates rise.

What is yield to maturity?

The discount rate that makes the present value of a bond’s payments equal to its price.

What distinguishes premium bonds?

Bonds selling above par value, where the coupon rate is greater than the yield to maturity.

What is a realized compound return?

The compound rate of return on a bond with all coupons reinvested until maturity.

What is a zero-coupon bond?

A bond that carries no coupons and provides all return in the form of price appreciation.

What is an investment-grade bond?

A bond rated BBB and above by S&P or Baa and above by Moody’s.

What is a sinking fund in bond indentures?

A provision that calls for the issuer to periodically repurchase some proportion of outstanding bonds before maturity.

Define collateral in terms of bonds.

A specific asset pledged against possible default.

What is a default premium?

An increment to the promised yield that compensates investors for default risk.