Bond Basics
This is the amount owed at maturity, also called the “face value” or “par value.”
What is the principal?
This individual or institution represents bondholders and enforces the terms of the indenture.
Who is the trustee?
These bonds are secured by real estate assets that serve as collateral.
What are mortgage bonds?
These short-term federal securities are quoted in terms of yields.
What are Treasury bills?
This fund is used to make periodic payments to retire a bond issue.
What is a sinking fund?
One major risk of bonds is this — when inflation reduces purchasing power.
What is inflation risk?
This date specifies when a bondholder must be repaid the principal amount.
What is the maturity date?
These classification systems indicate the risk associated with a debt instrument.
What are credit ratings?
These bonds are repaid in installments over several years, often used by transportation firms.
What are serial bonds?
Bonds issued by local or state governments that are exempt from federal income tax.
What are municipal bonds?
This feature allows a debtor to retire a bond early.
What is a call feature?
Rising interest rates can reduce this aspect of a bond’s market value.
What is price or market value?
The document specifying the terms of a bond issue is known as this.
What is an indenture?
This rating category is considered safer, typically rated BBB or better.
What is investment grade?
These bonds are paid interest only if the firm earns sufficient income.
What are income bonds?
In the formula ic(1 − t) = im, “t” represents this.
What is the individual’s tax bracket?
A company can also retire debt by doing this in the open market.
What is repurchasing debt?
This is the risk that a bond issuer fails to pay interest or principal.
What is default risk?
Failure to meet the terms of a debt issue is called this.
What is default?
Poor-quality debt instruments that offer higher returns are often called this.
What are junk bonds or high-yield securities?
These bonds can be exchanged for stock at the holder’s option.
What are convertible bonds?
These bonds are issued in the U.S. by foreign firms and denominated in U.S. dollars.
What are Yankee bonds?
These bonds mature in installments, not all at once.
What are serial bonds?
Investors often choose bonds for these three benefits.
What are interest income, safety of principal, and diversification?
This measure represents the return earned from holding a bond until it matures.
What is yield to maturity?
The yield difference between low-quality and investment-grade bonds reflects this type of premium.
What is a risk premium?
These are long-term debt instruments with no periodic interest payments, sold at a discount.
What are zero-coupon bonds?
These bonds are sold in a foreign country but denominated in the issuing firm’s currency.
What are Eurobonds?
The trend toward electronically recorded bonds rather than physical certificates is known as this.
What are book-entry bonds?
This type of bond adjusts its interest rate based on short-term interest rate or inflation changes.
What are variable interest rate bonds?