Bond Prices and Yields

These flashcards cover essential terms and concepts related to bond prices, yields, and risks as outlined in the lecture notes.

Bond

A security issued in connection with a borrowing arrangement; the issuer agrees to make specified payments to the bondholder on set dates.

Par Value

Also known as face value; the payment made to the bondholder at the bond’s maturity date.

Coupon Rate

The interest payments made by a bond per dollar of par value.

Bond Indenture

The contract between the bond issuer and the bondholder.

Accrued Interest

The prorated share of the upcoming coupon payment that a buyer pays the seller when purchasing a bond between coupon payment dates.

Flat Price

Also known as the quoted price; the actual price of a bond excluding accrued interest.

Dirty Price

The total price paid for a bond, including accrued interest.

Callable Bonds

Bonds that come with a period of call protection; the issuer can redeem them before maturity.

Convertible Bonds

Bonds that give holders the option to exchange each bond for a specified number of shares of the firm’s stock.

Yield to Maturity (YTM)

The interest rate that makes the present value of a bond’s payments equal to its price; a measure of the average rate of return on a bond.

Credit Risk

The risk that a bond will not make all promised payments.

Default Premium

A differential in promised yield that compensates the investor for the default risk of a corporate bond.

Credit Default Swap (CDS)

A financial derivative that allows lenders to buy protection against the default risk of a bond or loan.

Collateralized Debt Obligations (CDOs)

A financial tool that pools together cash-flow generating assets and repackages them into tranches to redistribute credit risk.

Financial Ratio Analysis

A method used to measure bond safety and assess credit risk.

Zero-Coupon Bonds

Bonds that do not pay periodic interest but are sold at a discount to their par value, maturing at par.

Inverse Relationship between Price and Yield

A key feature of fixed-income securities where an increase in interest rates leads to a decrease in bond prices.