Engineering Econ

Compound Interest

interest of loan or principal which is based not only on the original amount of the loan or principal plus the previous accumulated interest.

Effective Rate

actual or the exact rate of interest earned on the principal during a 1- year period.

Nominal Rate

It is rate quoted in describing a given variety of compound interest

Ordinary annuity

Is a type of annuity where the payments are made at the end of each period beginning from the first period.

Annuity

A series of uniform payments made at equal intervals of time

Annuity due

Is a type of annuity where the payments are made at the beginning of each period starting from the first period.

Deferred annuity

Is a type of annuity where the first payment does not begin until some later date in the cash flow.

Perpetuity

An annuity that does not have a fixed time span but

continues indefinitely

Bond

Is a type of debt or long-term promissory note, issued by the borrower, promising to pay its holder a predetermined and fixed amount of interest per year.

Debenture

Applies to any unsecured long-term debt. The earning ability of the issuing corporation is of great concern to the bond holder.

Mortgage bond

Is a bond secured by a lien on real property

Eurobonds

Issued in the country different from the one in whose currency the bond is denominated.

Zero and very low coupon bonds

Allow the issuing firm to issue bonds at a substantial discount from their $1 000 face value with a zero or very low coupon rate.

Junk Bonds

the term was used to describe bonds issued by “fallen angels”; that is, firms with sound financial histories that were facing severe financial problems and suffering from poor credit ratings.

Par value

face value that is returned to the bondholder at maturity

Coupon interest rate

indicates the percentage of the par value of the bond that will be paid out annually in the form of interest.

Maturity

indicates the length of time until the bond issuer returns the par value to the bond holder and terminates or redeems the bond.

Indenture

the legal agreement between the firm issuing the bond and the bond trustee who represents the bondholders.

Current yield

refers to the ratio of the annual interest payment to the bond’s current market price.

Bond Ratings

ratings involve a judgment about the future risk potential of the bond.

Value of bond

Is the present worth of all the amounts the bondholder will receive through his possession of the bond