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Details Title: Bond Terminology Description: Chapter 7 Terminology Total Flash Cards: 26 Created: 09/26/2007 20:24:51	To study from this set of flash cards, or to create your own your own study flash cards, register HERE. If you are already a registered user, CLICK HERE.
Cards Term coupon Definition the stated interest payment made on the bond Term Face value (par value) Definition the principal amount of a bond that is repaid at the end of the term Term Coupon rate Definition the annual coupon divided by the face value of the bond Term Maturity Definition the specified date on which the principal amount of a bond is paid Term Yield to maturity (YTM) Definition the rate required in the market on a bond Term Indenture (deed of trust) Definition the written agreement between the corporation and the lender detailing the terms of the debt issue Includes: 1. the basic terms of the bonds 2. the total amount of the bonds 3. a description of property used as security 4. the repayment arrangements 5. the call provisions 6. details of the protective covenants Term Registered Form Definition the form of a bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner on record Term Bearer Form Definition the form of a bond issue in which the bond is issued without record of the owner’s name; payment is made to whoever holds the bond Drawbacks – (1) difficult to recover if lost or stolen and (2) notification of important events is not possible directly to the bond holder Term Collateral Definition secured by financial securities Term Mortgage Bond Definition secured by real property, normally land or buildings (the document is called a mortgage trust indenture or trust deed) Term Debenture Definition unsecured debt with original maturity over 10 years Term Note Definition unsecured debt with original maturity less than 10 years Term Seniority Definition The preference in position over other lenders (Ex – senior and junior bonds) Term Bond Sinking Fund Definition an account managed by the bond trustee for early bond redemption Term Call provision Definition an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity Term Call premium Definition the amount by which the call price exceeds the par value of a bond Term Deferred call provision Definition a call provision prohibiting the company from redeeming a bond prior to a certain date Term Call protected bond Definition a bond that, during a certain period, cannot be redeemed by the issuer Term Protective covenant Definition a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender’s interests Term Negative covenant Definition “thou shalt not” type of covenant Examples - the firm must limit the amount of dividends it pays according to some formula - the from cannot pledge any assets to other lenders - the firm cannot merge with another firm - the firm cannot sell or ldase any major assets without approval by the lender - the firm cannot issue additional long-term debt Term Positive covenant Definition “thou shalt” type of covenant Examples - the company must maintain its working capital at or above some specified minimum level - the company must periodically furnish audited financial statements to the lender - the firm must maintain any collateral or security in good condition Term Bond Ratings Definition  High Grade  Moody’s Aaa and S&P AAA – capacity to pay is extremely strong  Moody’s Aa and S&P AA – capacity to pay is very strong  Medium Grade  Moody’s A and S&P A – capacity to pay is strong, but more susceptible to changes in circumstances  Moody’s Baa and S&P BBB – capacity to pay is adequate, adverse conditions will have more impact on the firm’s ability to pay  Low Grade  Moody’s Ba, B, Caa and Ca  S&P BB, B, CCC, CC  Considered speculative with respect to capacity to pay. The “B” ratings are the lowest degree of speculation.  Very Low Grade  Moody’s C and S&P C – income bonds with no interest being paid  Moody’s D and S&P D – in default with principal and interest in arrears Term Relationship between risk and return Definition r d = r f + risk premium where, rf = the compensation to investors for changes in expected inflation approximated by a 90 or 180-day T-Bill rate, and Risk premium = the compensation for other risk attributes of a bond Term Maturity premium Definition sensitivity of price changes to maturity changes Term Liquidity premium Definition ease in selling the bond to another party Term Default premium Definition financial quality of the firm issuing the debt where outsiders look to S&P and Moody’s for guidance