Intermediate Investments Chapter 10 Vocab

Bond

A security that obligates the issuer to make specified payments to the holder over a period of time.

Callable Bonds

Bonds that may be repurchased by the issuer at a specified call price during the call period.

Collateral

A specific asset pledged against possible default on a bond.

Convertible Bonds

A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm.

Coupon Rate

A bond’s annual interest payment per dollar of par value.

Credit Default Swap

An insurance policy on the default risk of a corporate bond or loan.

Current Yield

Annual coupon divided by bond price.

Debenture

A bond not backed by specific collateral.

Default Premium

The increment to promised yield that compensates the investor for default risk.

Discount Bonds

Bonds selling below par value.

Expectations Hypothesis

The theory that yields to maturity are determined solely by expectations of future short-term interest rates.

Floating-Rate Bonds

Bonds with coupon rates periodically reset according to a specified market rate.

Forward Rate

The inferred short-term rate of interest for a future period that makes the expected total return of a long-term bond equal to that of rolling over short-term bonds.

Horizon Analysis

Analysis of bond returns over a multiyear horizon, based on forecasts of the bond’s yield to maturity and the reinvestment rate of coupons.

Indenture

The document defining the contract between the bond issuer and the bondholder.

Investment Grade Bonds

A bond rated BBB and above by Standard & Poor’s or Baa and above by Moody’s.

Liquidity Preference Theory

The theory that investors demand a risk premium on long-term bonds.

Liquidity Premium

The yield spread demanded by investors as compensation for the greater risk of longer-term bonds.

Par Value

The payment to the bondholder at the maturity of the bond.

Premium Bonds

Bonds selling above par value.

Put Bond

A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years.

Realized Coupon Return

Compound rate of return on a bond with all coupons reinvested until maturity.

Reinvestment Rate Risk

Uncertainty surrounding the cumulative future value of reinvested bond coupon payments.

Sinking Fund

A bond indenture that calls for the issuer to periodically repurchase some proportion of the outstanding bonds prior to maturity.

Speculative Grade or Junk Bond

A bond rated BB or lower by Standard & Poor’s, Ba or lower by Moody’s, or unrated.

Spot Rate

The yield to maturity on a zero-coupon bond of a given maturity.

Subordination Clauses

Restrictions on additional borrowing that stipulate that senior bondholders will be paid first in the event of bankruptcy.

Term Structure of Interest Rates

The relationship between yields to maturity and terms to maturity across bonds.

Yield Curve

A graph of yield to maturity as a function of term to maturity.

Yield to Maturity (YTM)

The discount rate that makes the present value of a bond’s payments equal to its price.

Zero Coupon Bond

A bond paying no coupons that sells at a discount and provides only a payment of par value at maturity.