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bonds
type of debt or long term promissory note, issued by a borrower, promising to its holder a predetermined and fixed amount of interest per year and replayment of principal @ maturity
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debentures
unsecure long term debt; for bondholders tehre are more risky than secure bonds and provide a more higher yield than secure
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subordinated debenture
hierarchy of payout in case of insolvency
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mortgage bond
secured by alien on real propery, value of real property is greater than that of the bonds issued
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Eurobonds
securities (bonds) issued in a country different from one in whose currency the bond is denominated
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convertible bonds
debt securities that can be converted into a firm's stock at a pre-specified price
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seniority in claims
in case of insolvency, claims of debt, including bonds are honored before those of common or preferred stock
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par value
face value of the bond returned to the bondholder at maturity
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coupon interest rate
% of the par value of the bond that will be paid periodically in the form of interest
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maturity
length of time until the bond issuer returns the par value to the bondholder and terminates or redeems the bond
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call provision
if it exists on a bond; gives corporation the option to redeem the bonds before the maturity date
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indentured
the legal agreement between the firm issuing the bond and the trustee who represents teh bondholder; protect the status of bonds from being weakend by managerial actions or by other security holders
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bond ratings
reflects the future risk potential of the bonds
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lower bond ratings indicate
higher probability of default
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junk bonds
high-risk bonds with ratings of BB or below; aka high-yield bonds b/c pay high interest rate, 3-5% more than AAA rated bonds
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book value
value of an asset as show on a firm's balance sheet
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Liquidation value
dollar sum that could be realized if an asset were sold individually and not as part of a going concern
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market value
observed value for an asset in the marketplace
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intrinsic or economic value
fair value- present value of the asset's expected futrue cash flows
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in an efficient market the values of all securities
at any instant fully reflect all available public info
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if markets are efficient then
market value and intrinsic value will be the same
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value is determined by (3)
- -amount and timing of the asset's expected future cash flows
- -riskiness of CF
- -Investors ROR for undertaking investment
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yield to maturity (YTM)
discount rate that equates the present value of the cash flows with the current market price of the bond
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discount bonds
market value of bond is below par when the investor's RR is > coupon interest rate
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premium bonds
market value of bond is above par/face value when the investor's RR < coupon interest rate
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trade at par
bonds will trade @ par: if investor's required rate of return is = coupon interest rate
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3 main risks for bondholders
- changes in current interest rates (interest rrates rise, market value of bonds fall
- default risk (no or partial payment on debt as in bankruptcy cases)
- call risk (bonds called before maturity date)
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