Chapter 9: Debt Valuation and Interest Rates

These flashcards cover key concepts related to debt valuation and interest rates as discussed in the lecture notes.

Bond Indenture

A legal document produced by the issuer that identifies key characteristics of the issued security, essentially a contract.

Principal Amortization Feature

The feature where the principal is repaid over the life of the loan, as seen in mortgage loans.

Vanilla Bond

A bond with fixed coupon payments throughout its life, repaying principal at maturity.

Zero Coupon Bond

A bond that pays no coupon payments but pays its face value at maturity, sold at a discount.

Yield to Maturity (YTM)

The rate that makes the present value of the bond’s cash flows equal to the price of the bond.

Coupon Rate

The annual coupon payment expressed as a percentage of the bond's face value.

Bond Ratings

Indicators of the default risk of bonds, typically assigned letter grades by agencies like Moody’s and S&P.

Term Structure of Interest Rates

The relationship between yield to maturity and term-to-maturity on a bond, often represented as a yield curve.

Interest Rate Risk

The risk that bond prices will change due to variations in interest rates, most greatly impacting longer-term and lower-coupon bonds.

Par Value

The face value of a bond at maturity, which is typically $1,000 for corporate bonds.