ECON 490 Test 2
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26 Terms
Coupon Bonds
Periodic coupon (interest) payments and repay the principal at maturity
Consols
Periodic interest payment forever, no maturity, and the principal is never repaid
Zero-Coupon Bonds
Promise a single future payment
Investor Return
Difference between the purchase price and the face value received at maturity
Fixed Payment Loans
Primarily mortgage and auto loans
Amortization
Paying off a loan over time through regular, fixed payments, where each payment covers interest and partial repayment of principal
Yield to Maturity
Annualized return from holding a bond to maturity
Current Yield
Annual coupon income relative to the bond’s current price
Holding Period Returns
Total return from holding a bond over a specific period
Elasticity
Responsiveness of quantity supplied or demanded to changes in bond price
Bond Market Supply
Upward sloping; quantity moves directly with price
Bond Market Demand
Downward sloping; quantity moves inversely with price
Disequilibrium: Surplus
When supply is greater than demand, leads to lower prices
Disequilibrium: Shortage
When supply is less than demand, leads to higher prices
Equilibrium
Supply = Demand
Default Risk
Probability that an issuer may fail to make promised payments.
Inflation Risk
Risk that the real value of the payments from owning a bond will be different from what was expected; rising prices reduce the real return on a bond
Interest Rate Risk
Higher interest rates reduce a bond’s value
Benchmark Rate
A reference interest rate used for risk comparisons
Flight to Safety
Moving from riskier assets to safer assets
Municipal Bonds
Bonds issued by state and local governments to finance public projects; the coupon payments are exempt from federal and state income taxes
Junk Bonds
Bonds rated below investment grade
Ratings Upgrade
Increase in a bond's credit rating
Ratings Downgrade
Decrease in a bond's credit rating
Fallen Angel
Bond that has been downgraded below investment grade
Commercial Paper
Short-term version of a bond