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Chapter 5 - C hapter 5 Bonds Bond Valuation and I n terest...

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Chapter 5: Bonds, Bond Valuation, and Interest 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. Treasury 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 Interest 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 bond’s 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.
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Call Premium – an additional sum that is often set equal to one year’s 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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