6 - WGU C214 Financial Management - Debt Valuation and Interest Rates - 9pts

Secured Loan

some type of asset is being used as collateral

Unsercure Loan

not backed by a specific asset

Bond

primary means of money borrowed in the corporate world; it is a debt agreement w/investors & savers that obligates the corporation to make certain payments- a fixed income sercurity; stream of annual/semi-annual interest payments and a final principle w/interest payment

Fixed- income securities

pay a fixed interest rate each year

Par value

face value: the sum of money that the corporation promises to pay at the bond's expiration

Coupon Rate

coupon yield; the interest rate of the bond

Maturity

bonds are finite-term securities; issued/start date and expiration/maturity date

Covenats

outline things the company is obligating itself to do or not to do in order to protect bondholders

Affirmative covenants

describe things the company pledges itself to do

Negative covenants

things the company pledges to not do

Yield to maturity

the rate of return investors receive on a bond

Value of a bond

present value of its cash flows

Bond pricing calculations

if YTM & coupon rate are the same, then PV (payment value) & FV (face value) are the same

Bond pricing calulator inputs

figure PMT first; divide PMT & I and multiple N if it is not annual

PMT= FV x coupon rate ($1000 x .09= $90) / if needed

FV= face value

N= number of months/years (x if needed)

I= rate of return interest (/ if needed)

PV= value of bond

End mode

Bond Yield

return of a bond- yield to maturity

Bond Yield calculator inputs

solving YTM for price-PV or YTM for interest- I/Y

PV= bond price (always negative)

FV= face value

PMT= FV x coupon rate (/ if not annual)

N= number of years (x if not annual, adjust if not new)

I/Y= interest yield (adjust if not annual and always report as annual)

End mode

Debentures bond

unsecured, risky

Subordinated debentures bonds

unsecured and have a lower claim to the assets if liquidation occurs then debentures

Mortgage bonds

specific collateral; if defaults bond holders receive the asset

Zero bonds

zero coupon rate; sells at deep discounts

Eurobonds

payable in a currency not native to the country in which it is issued

Forgeign bonds

issued in a domestic market by a foreign firm, but in the domestic currency

Muni-bonds

Munis (short for municipal bond) are floated by local government (states, cities, counties) usually for infrastructure improvements exempt from federal taxation (investors from high tax brackets)

Treasury bonds

issued by the US Federal government to support deficit spending; risk-free

Convertible bonds

convertibility may be added to bonds; ability to convert bond into equity securities, usually common stock

Bond ratings

given by professional agencies that evaluate the creditworthiness of the company that issued the bond

(least risky/creditworthy- offers lower interest rates- AAA, AA, A, BBB, BB, B, CCC, etc)

Junk bonds

bond with a rating of BB or below, risky

also know as speculative or high yield debt (can result in higher returns than the stock market)

Investment grade

bonds rated BBB or higher; fairly low risk

Duration

a measurment that captures the volatility of a bond's price based upon interest rate movement

Interest rate sensitivity or price sensitivity

the sensitivity of the price of the bond to change in interest rates

Factors that impact bond price change

time to maturity and the coupon rate

Inverse price yield relationship

when inflation changes the existing bond price will move in the opposite direction

duration x change in interest rate