Interest Rates and Bond Valuation

These flashcards cover key concepts related to interest rates and bond valuation.

Bond

A debt contract or interest-only loan; typically has a par value of approximately $1,000.

Coupon Rate

The stated interest rate of a bond, used to calculate coupon payments.

Yield to Maturity (YTM)

The market-required rate of return for bonds of similar risk and maturity; also considered the discount rate used to value a bond.

Current Yield

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

Discount Bond

A bond selling for less than its par value, typically when the YTM is greater than the coupon rate.

Premium Bond

A bond selling for more than its par value, typically when the YTM is less than the coupon rate.

Bond Indenture

A contract between the issuing company and bondholders, detailing the bond's terms and conditions.

Bond Ratings

Assessments of a bond's credit quality, indicating the likelihood of default.

Zero Coupon Bonds

Bonds that do not make periodic interest payments; their yield comes from the difference between the purchase price and par value.

Floating Rate Bonds

Bonds with coupon rates that fluctuate based on an index, reducing price risk.

Fisher Effect

The relationship between real interest rates, nominal interest rates, and inflation.

Nominal Rate of Interest

The quoted rate of interest, reflecting the change in purchasing power and inflation.