Corporate Finance Mid Term

sinking fund provision that requires the corporation to retire a portion of the bond issue each year. The purpose of the sinking fund is to provide for the orderly retirement of the issue. A sinking fund typically requires no call premium.
bond provision that requires the corporation to retire a portion of the bond issue each year. The purpose of the sinking fund is to provide for the orderly retirement of the issue. A sinking fund typically requires no call premium.
zero coupon bonds long term bond which pay no annual interest but are issued at a discount
floating rate debt Bonds whose interest payments fluctuate with changes in the general level of interest rates;
junk bonds high-risk, high-yield instruments issued by firms that use a great deal of financial leverage.
call provision gives the issuing corporation the right to redeem the bonds prior to maturity under specified terms, usually at a price greater than the maturity value (the difference is a call premium)
call premium difference between regular price and the maturity value when a bond is called
When will a firm call a bond A firm will typically call a bond if interest rates fall substantially below the coupon rate.
YTM The expected rate of return on a bond held to maturity is defined as the bond’s
YTC (call) The expected rate of return on a callable bond held to its call date
the required rate of return on debt (rd) the rate needed to fairly compensate investors for purchasing or holding debt, taking into consideration its cash flows’ risk and timing.
Other names for rd (required rate of return on debt) going rate, the market interest rate, the quoted interest rate, or the nominal interest rate.
real risk-free interest rate (r) rate that a hypothetical riskless security pays each moment if zero inflation were expected.
risk-free interest rate (rRF) is the quoted rate on a U.S. Treasury security, which is default-free and very liquid. The short-term risk-free rate is approximated by a T-bill’s yield; the long-term risk-free rate is approximated by a T-bond’s yield.
Treasury Inflation-Protected Securities (TIPS) U.S. Treasury bonds that have no inflation risk.
interest rate risk vs. reinvestment rate risk The longer the maturity of a bond, the more its price will change in response to a given change in interest rates; this is called interest rate risk. However, bonds with short maturities expose investors to high reinvestment rate risk, which is the risk that income from a bond portfolio will decline because cash flows received from bonds will be rolled over at lower interest rates.

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