Bond Prices and Interest Rate Risk

Vocabulary flashcards covering key terms from Chapter 5 on Bond Prices and Interest Rate Risk.

Bond

A form of loan—a debt security obligating a borrower to pay a lender principal and interest.

Coupon Rate

The original interest rate promised as a percentage of par value on the face of the bond.

Issuer

The borrower who issues the bond and promises to make periodic payments to the lender.

Bondholder

The lender or investor who holds the bond and receives interest payments and principal at maturity.

Par Value

The face value of a bond that the issuer pays back to the bondholder at maturity.

Market Value

The current price at which a bond is bought or sold in the market.

Yield to Maturity (YTM)

The discount rate at which the present value of a bond's expected payments equals its current market price.

Interest Rate Risk

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

Duration

A measure of interest rate risk, reflecting the sensitivity of a bond's price to changes in interest rates.

Zero Coupon Bonds

Bonds that do not pay periodic interest and are issued at a discount that matures at par value.

Credit Risk

The risk that the issuer may be unable or unwilling to make required payments on the bond.

Price Risk

The risk of variability in bond prices due to changes in interest rates.

Reinvestment Risk

The risk that future cash flows from a bond may be reinvested at lower rates than the bond's original yield.

Total Return

A yield metric that considers both capital gains or losses as well as changes in reinvestment rate.

Bond Cash Flows

The stream of cash flows from a bond which includes periodic interest payments and the return of par value.