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Unformatted text preview: Chapter 5: Bonds, Bond Valuation, and I nterest Rates Bond is a long term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond. T reasury Bonds are sometimes referred to as government bonds, are issued by the U.S. federal government. Corporate Bonds as the name implies, are issue by corporations. Municipal Bonds or munis are issued by state and local governments. Foreign Bonds are issued by foreign governments or foreign corporations. Par Value is the stated face value of the bond. Coupon Payment Dollar amount of interest paid to each bondholder on the interest payment dates. Coupon I nterest Rate Stated rate of interest on a bond, defined as the coupon payment divided by the par value. Floating - Rate Bond is a bond whose coupon payment may vary over time. Zero Coupon Bonds pays no coupons at all but is offered at a substantial discount below its par value and hence provides capital appreciation rather than interest income. Original Issue Discount Bond in general, any bond originally offered at a price significantly below its par value. Payment-in-kind Bonds PIK bonds, usually issued by companies with cash flow problems, which makes them risky. Maturity date the date when the bonds par value is repaid to the bondholder. Original Maturities the maturity at the time the bond is issued; ranging from 10-40 years. Call Provision gives the issuing corporation the right to call the bonds for redemption. Call Premium an additional sum that is often set equal to one years interest if the bonds are called during the first year, and the premium declines at a constant rate of INT/N each year thereafter, where INT = annual interest and N=original maturity in years....
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