Reference no: EM131719888
a. The bond refers to the promissory note which is issue by the issued governmental department. Treasury bonds issued by the Federal government also not expose as the default risk. The corporation issues the corporate bonds this bond also exposes to the default risk. The local government issued the Municipal bonds. The Foreign governments are issued the foreign bonds, this bond not exposes to the default risk.
b. The face value of the bond is called par value. When the par value is repay to the bondholder then it called the maturity date. The amount which paid to the bondholder as the interest is called coupon payment. The stated rate of interest on the bond is called coupon interest rate.
c. If the bond coupon rate are very then it's called floating rate bonds. If there is no coupon on band then it's called Zero coupon bonds. If the bond is offer on different price less than its par value then bond is called original issue discount bond.
d. If the bonds are called by the company then company must pay higher value then the bond par value this is called call provision. The redeemable bonds are the bond in which the right with investors to sell the bonds back to the corporation. If there is orderly retirement of a bond issue then that is called the sinking fund.
e. At the fixed price the bond convertible into shares of common stock it's called Convertible bonds. If the buyer busy the stock at stated price then that is called a warrants. Income bonds pay interest only if the interest is earned.
f. If the selling price of bond is less than the par value it's called discount bonds, if the selling price of bond is more than the par value it's called premium bonds.
g. If the annual coupon payment divided by the current market price is called the current yield. Rate of interest earned on a bond is called YTM. If the bond is called the earn rate of interest on a bond is called YTC.
h. Debenture holders are general creditors' claims are protected by the property. At the time of bankruptcy Subordinated debentures have claims also designated notes payable or to all other debt.
i. Tax-exempt bond sold by state governments is called development bonds. Insurance company guarantees to pay the coupon and principal payments that is called municipality's bonds insurance.
j. Interest rate equals to the aggregate supply and demand un-risky condition in the economy that is called real risk-free rate. Real risk free rate in addition of premium for expected inflation is called nominal risk-free rate.
k. Addition of premium to the real risk-free rate of interest to compensate for the expected then this condition called inflation premium. If the borrower will not pay the principal and interest then that is called as default risk premium. The firm cash condition called the liquidity.
l. If the bond prices down when interest rates up this condition called interest rate risk. Maturity risk premium is risk-free rate of interest to compensate for interest rate risk. When a short-term debt security rolled out then reinvestment rate risk occurs.
m. The YTM and term to maturity for bonds of a single risk class is representing by the term structure of interest rates. When the yield to maturity is plotted on the Y-axis with term to maturity on the X-axis than this is called yield curve.
n. If the yield curve slopes upward then this condition called normal if the yield curve slopes upward is downward then this condition called abnormal.