The Risks
The risk that when rates rise, bond prices fall.
What is interest rate risk?
Name comes from the tear off portion of bonds that investors used to submit to collect their interest payments. Defines the amount of annual interest income.
What is the coupon rate? (aka nominal rate, coupon yield, and nominal yield)
The date on which the principal of a bond must be repaid.
What is maturity date?
Provision that specifies whether and under what circumstances the issuer can retire (prepay) the bond prior to the maturity date.
What is a call provision?
The price the issuer must pay to retire a bond early.
What is call price?
The risk of inflation outstripping your return on your investment in bonds.
What is purchasing power risk?
The typical frequency of bond interest payments.
What is every six months?
Every bond in the issue matures at the same time; most common.
What are term bonds?
When interest rates do this, bond issuers want to refinance.
What is fall or drop?
The call price for a $1,000 par bond with a $100 call premium.
What is $1100?
The risk the issuer will default on interest payments/principal repayment.
What is Business Risk/Financial Risk/Default Risk?
The amount of capital that must be repaid at maturity. The amount of the loan.
What is principal?
What are serial bonds?
The three types of call provisions.
What are freely callable, non-callable, and deferred call?
What is inversely/inverse relationship?
The risk the issuer will decide to recall/pay off bonds before maturity.
What is Call/Prepayment Risk?
The principal amount of most bonds.
What is $1,000?
The technical difference between a bond and a note.
What is time to maturity?
What is call protection period or call deferment period?
A bond with a market value great than the par value. Occurs when prevailing interest rates drop below the coupon rate
What is a premium bond?
The risk that you cannot find a buyer for a bond you want to sell and therefore cannot turn your investment into cash.
What is liquidity risk?
The amount of interest paid annually on a 7%, 30-year bond with a standard face value.
What is $70?
Bonds that never mature are called this.
What are perpetuities or consols?
The amount that is added to a bond’s par value and paid to investors when a bond is retired prematurely; similar to a prepayment penalty.
What is call premium?
A bond with a market value lower than par value. Occurs when prevailing interest rates are greater than the coupon rate and if there is a perceived danger of default.
What is discount bond?