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FA - Chapter 7
Bonds and Their Valuation
32
Business
Undergraduate 2
04/17/2011

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Term
Treasury Bonds
Definition
Bonds issued by the federal government, sometimes referred to as government bonds.
Term
Corporate Bonds
Definition
Bonds issued by corporations.
Term
Municipal Bonds
Definition
Bonds issued by state and local governments.
Term
Foreign Bonds
Definition
Bonds issued by foreign governments or by foreign corporations.
Term
Par Value
Definition
The face value of a bond.
Term
Coupon Payment
Definition
The specified number of dollars of interest paid each year.
Term
Coupon Interest Rate
Definition
The stated annual interest rate on a bond.
Term
Fixed-Rate Bond
Definition
A bond whose interest rate fluctuates with shift in the general level of interest rates.
Term
Zero Coupon Bond
Definition
A bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation.
Term
Original Issue Discount (OID) Bond
Definition
Any bond originally offered at a price below its par value.
Term
Maturity Date
Definition
A specified date on which the par value of a bond must be repaid.
Term
Original Maturity
Definition
The number of years to maturity at the time a bond is issued.
Term
Call Provision
Definition
A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.
Term
Sinking Fund Provision
Definition
A provision in a bond contract that requires the issuer to retire a proportion of the bond issue each year.
Term
Convertible Bond
Definition
A bond that is exchangeable at the option of the holder for the issuing firm's common stock.
Term
Warrant
Definition
A long-term option to buy a stated number of shares of common stock at a specified price.
Term
Putable Bond
Definition
A bond with a provision that allows its investors to sell it back to the company prior to maturity at a prearranged price.
Term
Income Bond
Definition
A bond that pays interest only if it is earned.
Term
Indexed (Purchasing Power) Bond
Definition
A bond that has interest payments based on an inflation index so as to protect the holder from inflation.
Term
Discount Bond
Definition
A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate.
Term
Premium Bond
Definition
A bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate.
Term
Yield to Maturity (YTM)
Definition
The rate of return earned on a bond if it is held to maturity.
Term
Yield to Call (YTC)
Definition
The rate of return earned on a bond when it is called before its maturity date.
Term
Interest Rate (Price) Risk
Definition
The risk of a decline in a bond's price due to an increase in interest rates.
Term
Reinvestment Rate Risk
Definition
The risk that a decline in interest rates will lead to a decline in income from a bond portfolio.
Term
Investment Horizon
Definition
The period of time an investor plans to hold a particular investment.
Term
Mortgage Bond
Definition
A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds.
Term
Indenture
Definition
A formal agreement between the issuer and the bondholders.
Term
Debenture
Definition
A long-term bond that is not secured by a mortgage on specific property.
Term
Subordinated Debenture
Definition
A bond having a claim on assets only after the senior debt has been paid off in the event of liquidation.
Term
Investment-Grade Bond
Definition
Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds.
Term
Junk Bond
Definition
A high-risk, high-yield bond.
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