1. Define interest rate.
    The rental price of money. Usually expressed as an annual percentage of the nominal amount of money borrowed.
  2. Define real rate of interest.
    The equilibrium rate of interest. The real rate of interest is determined by the real output of the economy.
  3. Define nominal interest rate.
    The rate of interest actually observed in financial markets- the market rate of interest.
  4. Define time value of money.
    A dollar today is worth more than a dollar received at some future date.
  5. Define par value. (par value, principal, or face value)
    The stated or face value of a stock or bond. For debt instruments, the par value is usually the final principal payment.
  6. Define coupon.
    The periodic interest payment in a bond contract.
  7. Define coupon rate.
    The magnitude of the coupon payments.
  8. Define zero coupon bonds.
    No coupon payment but promise a single payment at maturity. Ex. US Treasury bills and US savings bonds
  9. Define yield-to-maturity or promised yield.
    It is the yield promised the bondholder on the assumption that the bond is held to maturity, all coupon and principal payments are made as promised, and the coupon payments are reinvested at the bond's promised yield for the remaining term- to-maturity.
  10. The market rate of interest rises, a bond's market price declines; or as the market rate of interest declines, a bond's market price rises. This inverse relationship exists because the coupon rate or interest rate on a bond is fixed at the time the bond is issued.
  11. Define bond price volatility.
    The percent change in bond prices for a given change in interest relationships.
  12. Define interest rate risk.
    The risk related to changes in interest rates that cause a bond's total return to differ from the promised yield or yield- to-maturity.
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