Federal Reserve and Interest Rates (Fed) - Answers change interest rates to control inflation and
economic growth. Economic slowdown decrease in interest rates. Companies can borrow at lower rates.
More spending = higher inflation
Term structure of interest rates - Answers relationship[p btw ST and LT interest rates of default- free
securities
ST>= LT - Answers recession
interest rates - Answers cost of money for a borrower
low rate bonds(CCC) have higher premiums than high rate bonds (AAA)
LRP - Answers Liquidity risk premium
, bonds that reade less frquently have higher premiums
TP - Answers Taxability premium
remember municipal versus taxable corportate bonds
Rm= - Answers Rf+RP
Rf= - Answers rf + E[h]
Fisher effect - Answers Nominal rate= real rate + inflation
bond - Answers LT contract under which the borrower agrees to make pymts of interest and principals
on specific dates to the holder of the bond (creditor)
types of bonds - Answers treasury bond, municipal bond, corporate bond
indenture (legal doc) - Answers written agreement btw the corp and lender
Security of Bonds - Answers collateral, mortgage, debenture (unsecured), seniority
Repayment - Answers face value pf bond can be paid back at maturity date or before.
Call provision - Answers issuer can call bonds for redemption, pay call premium, only callable after
several years
protective covenants - Answers limits action of corps, protect lender (leasing restrictions, no add. debt,
assets can be given to other lenders, limit on div. pymt)
Zero Coupon Bonds (Discount Bonds or Discount loan) - Answers coupon rate=0, no periodic interest
pymt; sold below par value; YTM diff. btw purchase price and par value (capital gain only); tax
implication of ZCB
Floating- Rate Bonds - Answers coupon pymts are adjustable depending on some base value; interest in
T-bills; inflation
income bonds - Answers coupon pymt depends on company income; not very common
Convertible bonds - Answers swapped for shares; low coupon rate but chance of large capital gains
Put Bonds - Answers Allows investors to sell the bond back to issuer prior to maturity ; adv. for holder if
interest rates increase; low coupon rate
Par value - Answers face value of a bond; $1000 = 100% or 100
Coupon Rate (CR) - Answers stated annual interest on a bond; fixed until end of bond; Constant
Coupon Payment (Coupon) - Answers fixed amount which is paid each year; Example if CR is 10% the
coupon pymt is $100
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