Chapter 7: Interest Rates and Bond Valuation

Vocabulary flashcards covering key terms and definitions related to bonds and their valuation.

Bond

A debt security issued by corporations or governments to raise funds; represents a loan made by investors to the issuer.

Coupon

The stated interest payment made on a bond, typically expressed as a percentage of the face value.

Face Value

The principal amount of a bond that is repaid at the end of the term; also referred to as par value.

Yield to Maturity (YTM)

The total return expected on a bond if it is held until maturity, expressed as an annual rate.

Maturity

The specified date on which the principal amount of a bond is paid to the bondholder.

Interest Rate Risk

The risk that changes in interest rates will affect the value of a bond.

Premium Bond

A bond that sells for more than its face value, typically due to a higher coupon rate compared to current market rates.

Discount Bond

A bond that sells for less than its face value, typically due to a lower coupon rate compared to current market rates.

Current Yield

The bond's annual coupon payment divided by its current market price.

Protective Covenant

A clause in a bond indenture that restricts the actions of the borrower in order to protect the interests of lenders.