Term
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Definition
| Governments, Corporations, Agencies, Municipalities |
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Term
| Why do corporations issue debt |
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Definition
Raise capital to expand business
Repay pre-existing, maturing debt
Tax advantages (compared to equity)
Disclosure advantages (compared to equity)
Lower cost of funding |
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Term
| How do bonds differ from equities |
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Definition
Size - many securities to invest in versus one stock of said company
Transparency - Trades are executed dealer-to-dealer in the bond market vs. publicly known like stock prices. There is no central record of all of the transaction prices in the bond market.
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Term
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Definition
| The institution or borrower of the loan, the issuer is required to repay the lender. |
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Term
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Definition
| Dollar value of one share, bonds are priced as a percent of par |
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Term
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Definition
| Dollar loan value paid at maturity |
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Term
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Definition
| the amount of return an investor will realize on a bond. returns are based on all future cashflows received. |
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Term
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Definition
| The price that someone is willing to pay for the bond is always given in relation to 100, or par value. A bond quote above 100 means that the bond is trading above par when below 100 it is trading below par. |
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Term
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Definition
| Date you trade on the price with your broker |
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Term
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Definition
| Date that money exchanges hands, when the accrual period begins |
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Term
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Definition
| the amount of return an investor will realize on a bond. |
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Term
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Definition
| The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. |
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Term
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Definition
| The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap). |
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Term
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Definition
| The possibility that an investment will have a lower buying power after awhile because of the effects of inflation. |
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Term
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Definition
| The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. Reinvestment risk is more likely when interest rates are declining. |
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Term
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Definition
| The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. |
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Term
| Why governments issue debt |
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Definition
| Refinance maturing debt - pay off existing debt |
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Term
| Characteristics of Gov't Bonds |
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Definition
risk free
fixed rate
issued by any sovereign government |
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Term
| Advantages of Government Bonds |
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Definition
- Minimal Default risk
- incredibly liquid
- AAA- rated
- New bonds constantly available
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Term
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Definition
- Low relative return (classic risk v. return)
- inflation risk
- interest rate risk
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Term
| Fed and Treasury Influences |
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Definition
-
Open Market Operations
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Discount Window Rate
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Reserve Requirements
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