62 Glossary of Key Terms

bond call
a feature of certain bonds or other fixed-income instruments that allows the issuer to repurchase and retire these instruments before maturity
bond price
the present, discounted value of the future cash stream generated by a bond; the sum of the present values of all likely coupon payments and the present value of the par value at maturity
bond ratings
grades assigned to bonds by rating services that indicate their overall credit quality
Business Cycle Dating Committee
a subdivision of the National Bureau of Economic Research (NBER), the US government agency that maintains a chronology of US business cycles
call risk
the risk that a bond issuer will redeem a callable bond prior to maturity
capital gains
the increase in a capital asset’s value that is realized when the asset is sold
cash rate
the interest rate that a central bank, such as the Reserve Bank of Australia or the US Federal Reserve System, will charge commercial banks for loans; also known as the bank rate or the base interest rate
convertible bonds
fixed-income corporate debt securities that yield interest payments but can be converted into a predetermined number of common stock or equity shares
coupon payment
the periodic dollar value of interest that is paid to a bondholder by the bond issuer
coupon rate
the amount of annual interest paid by the bond issuer; is multiplied by the face value of a bond to determine annual interest or coupon payment amounts
credit risk
the risk taken by a bond investor that the bond issuer will default by failing to pay interest and repay the principal on schedule
deep discount bonds
bonds that sell at significantly lower values than their par values
default
when an issuer fails to make scheduled interest or principal payments on its bonds
default risk
the risk taken by investors that payments will be delayed or will not occur
discount bond
a bond currently trading for less than its par value in the secondary market; offers a coupon rate that is lower than prevailing interest rates
duration
a measure of how much bond prices are likely to change if and when interest rates move
duration risk
the risk associated with the sensitivity of a bond’s price to a 1% change in interest rates
Federal Reserve funds rate (federal funds rate)
the target interest rate, set by the Federal Reserve, at which commercial banks borrow and lend their excess reserves to each other
Federal Reserve System (the Fed)
the central banking system of the United States, responsible for administering fiscal policy for the country
fixed-income securities
investments that provide a return in the form of fixed, periodic interest payments and the eventual return of principal at maturity; the most common forms are bonds
floating-rate bonds
bonds with variable interest rates that allow investors to benefit from rising interest rates
interest income
annual interest amounts paid, or coupon payments made, on a bond between its issue date and the date of maturity
interest rate risk
the risk of investment losses that result from changes in interest rates
investment grade
describes a municipal or corporate bond with a rating that indicates it presents a low risk of default
junk bonds
bonds that have been given a low credit rating, below investment grade; riskier than other bonds due to a greater chance that the issuer will default or experience a credit event
liquidity risk
risk that stems from the lack of marketability of an investment, meaning that it cannot be bought or sold quickly enough to prevent or minimize a loss
London Interbank Offered Rate (LIBOR)
a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans
maturity date
the date on which a bondholder ceases to receive interest payments on a bond investment and instead is repaid its par, or face, value
municipal bonds (“munis”)
debt securities issued by state and local governments; can be thought of as loans that investors make to local governments to fund infrastructure
par value
also called the face amount or face value; the value written on the front of the bond, which is the amount of money that bond issuers promise to be paid at maturity
premium bond
a bond that is trading above its par value in the secondary market; offers a coupon rate that is higher than the current prevailing interest rates being offered
prime rate
the interest rate that banks charge creditworthy corporate customers; among the most widely used benchmarks for setting home equity lines of credit and credit card rates, based on the federal funds rate set by the Federal Reserve
rating agencies (bond rating services)
independent service agencies, such as Fitch, Moody’s, or Standard & Poor’s, that perform the isolated function of credit risk evaluation
realized return
the actual return that an investor earns over a given time period through the buying and selling of a security
reinvestment risk
the risk that an investor will be unable to reinvest cash flows received from an investment (e.g., coupon payments or interest) at a rate comparable to their current rate of return
savings bonds
debt securities purchased by investors, as a personal investments or as gifts, that the US government issues to pay for certain public or government programs
term risk
the risk of potentially earning lower returns on longer-term bond holdings compared to those potentially available when making several shorter-term investments over the same period of time
US Treasury bills (T-bills)
short-term US government debt obligations backed by the Treasury Department with a maturity of one year or less
US Treasury note rate
the interest rate that the US government pays to borrow money for different lengths of time; notes are issued in terms of two, three, five, seven, and 10 years
yield curve
a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates; gives an idea of future interest rate changes and economic activity
yield to maturity (YTM)
the total return anticipated on a bond if the investment is held until maturity
zero-coupon bonds
bonds that are issued at a deep discount from face value and offer no interest or coupon payments

 

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This chapter is from “Principles of Finance”  https://openstax.org/books/principles-finance/pages/1-why-it-matters by Dahlquist and Knight. This book is licensed under the CC-BY 4.0 license. 2022 OpenStax.

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