Term
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Definition
A "Bond" in a promised series of cash flows in the form of:
Interest Payments
Par Value (Principal Amount)
Unless there is a floating rate feature, once issued a bond
provides the investor with a FIXED CASH FLOW |
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Term
| Risk Associated with Bonds: Interest Rate Risk |
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Definition
| risk that interest rates will rise and the value of the bond will fall |
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Term
| Risk Associated with Bonds: Liquidity Risk |
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Definition
| risk that you cannot sell a bond when you want without a loss of value |
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Term
| Risk Associated with Bonds: Purchasing Power Risk |
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Definition
| risk that price increases will outstrip the nominal interest return |
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Term
| Risk Associated with Bonds: Business Risk |
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Definition
| risk that the borrower will default on the interest and/or principal payment |
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Term
| Risk Associated with Bonds: Call Risk |
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Definition
| the risk that the bond will be called before maturity |
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Term
| Risk Associated with Bonds: Reinvestment Rate Risk |
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Definition
| the risk that interest rates will fall and the bond holder will have to reinvest interest income at a lower rate than that rate at which the bond was purchased |
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Term
| Maturity Features: Term Bond |
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Definition
| bond with a single maturity date |
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Term
| Maturity Features: Serial Bond |
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Definition
| bond with many different maturity dates; at each maturity a predefined proportion of the bond is paid off |
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Term
| Maturity Features: Callable Bonds |
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Definition
| bonds which can be repurchased by the issuer prior to maturity |
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Term
| Maturity Features: Sinking Fund Provision |
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Definition
| stipulations as to how a bond will be paid off over time |
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Term
| Collaterlization: Senior Bonds |
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Definition
secured obligations
Ex: mortgage bonds
collateral trust bonds
equipment trust certificates |
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Term
| Collaterlization: Junior Bonds |
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Definition
unsecured obligations
Ex:debentures
subordinated debentures
income bonds |
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Term
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Definition
U. S. Treasury: Bonds and notes
Government Agencies: FANNIE MAE, FREDDIE MAC, etc.
Municipal Governments: state and local governments; interest on these bonds is tax-free (federal income tax)
Corporations |
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Term
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Definition
| for comparison purposes, you need to put yields on a tax equivalent basis |
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Term
| Special Bond Features: Variable Rate Note |
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Definition
| after a specified time, the coupon rate becomes variable, floating above the T-Bill rate; therefore every year, the notes are redeemable at par if bond holders desire |
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Term
| Special Bond Features: Put Bond |
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Definition
| a bond that gives the bondholder the right to sell the bond back to the issuer |
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Term
| Special Bond Features: Zero-Coupon Bond |
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Definition
| deep discount bonds; no periodic interest; obviates reinvestment risk |
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Term
| Special Bond Features: Treasury Strip |
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Definition
| zero-coupons created from treasury issues; now issued by the treasury |
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Term
| Special Bond Features: Mortgage - backed bonds |
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Definition
Government National Mortgage Association {GNMA}
Federal Home Loan Mortgage Corporation (FHLMC)
(Freddie Macs)
Federal National Mortgage Association {FNMA} |
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Term
| Special Bond Features: Collateralized Mortgage Obligations {CMO's} |
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Definition
| mortgage backed bonds whose holders are divided into classes based on their investment horizon; principal is channeled to short-term investors first, intermediate investors next, and long-term investors last |
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Term
| Special Bond Features: Asset Backed Securities |
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Definition
| like CMO's but backed by pools of bank loans leases, etc. |
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Term
| Special Bond Features: Junk Bonds |
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Definition
| low rated (non-investment grade) bonds (B or less); there are a variety of quality of junk |
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Term
| Foreign Considerations: Yankee Bonds |
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Definition
| bonds issued by foreign entities denominated in dollars and registered with the SEC |
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Term
| Foreign Considerations: Eurodollar Bonds |
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Definition
foreign bonds denominated in dollars, but not registered with
the SEC |
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Term
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Definition
Moodys
Standard & Poors
Fitch Investors Service
Duff & Phelps |
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Term
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Definition
Bond Prices are inversely related to interest rates
The longer the time to maturity, the more sensitive bond prices are
to changes in interest rates
The lower the coupon rates, the more sensitive bond prices are to
changes in interest rates. |
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Term
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Definition
| {the amount borrowed; the principal amount} |
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Term
| A Coupon Bond: Coupon Interest Rate |
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Definition
| {the nominal interest rate; that rate which determines the dollar amount of interest the bond will pay} |
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Term
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Definition
| {the length of time before the par value is paid off} |
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Term
| A Coupon Bond: Period of Interest Payments |
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Definition
| {bonds generally pay interest semi-annually} |
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Term
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Definition
A bond where both the principal and regular coupon payments--which have been removed--are sold separately. Also known as a "zero-coupon bond."
Zero coupon bonds have a duration equal to the bond's time to maturity, which makes them sensitive to any changes in the interest rates. Investment banks or dealers may separate coupons from the principal of coupon bonds, which is known as the residue, so that different investors may receive the principal and each of the coupon payments. This creates a supply of new zero coupon bonds. |
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