GO WITH THE FLOW
Level cash flows at the end of the period, for a fixed time
What is an annuity?
The interest rate expressed as the rate per period
What is the stated interest rate?
The rate of interest that a bond pays
What is the coupon rate?
The category of bonds rated AAA through BBB
What is investment grade?
Compensation to investors for expected future price rises
What is the inflation premium?
Level cash flows at the beginning of the period, for a set time
What is an annuity due?
The annual rate you actually earn after compounding
What is the Effective Annual Rate (EAR)?
The return on bonds held to maturity (interest + capital gain)
What is Yield to Maturity (YTM)?
A trader who takes possession, instead of taking a commission
What is a dealer?
Compensation to investors for risk that prevailing rates will rise
What is the interest rate risk premium?
Level cash flows at the end of the period, forever
What is a perpetuity?
The rate per period times the number of periods per year
The higher of coupon rate or YTM, for bonds sold at a discount
What is YTM?
The price being offered to buy a bond
What is bid price?
Compensation to investors for risk that the issuer will fail to pay
What is the default risk premium?
To bring future cash flows back to their present value
What is discounting?
The rate used to bring future funds back to their present value
What is the discount rate?
The higher of coupon rate or YTM, for bonds sold at a premium
What is coupon rate?
The price as quoted, without accrued interest
What is the clean price?
Compensation to investors for difficult to sell investments
What is the liquidity premium?
To take present cash flows forward to their future value
What is compounding?
The rate when funds are compounded instantly
What is the continuously compounded rate?
The price of a bond, when coupon rate exactly equals YTM
What is par value?
The bond dealer's profit margin
What is the spread?
Compensation to investors for unfavorable treatment by the IRS
What is the taxability premium?