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Fundamentals of Corporate Finance, 4/c/e
Fundamentals of Corporate Finance, 4/e
Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Interest Rates and Bond Valuation

Key Terms

Below are the key terms featured in this chapter. Clicking on a term will reveal its definition. The textbook's full glossary is also available for online searching.
Bearer Form  Bond issued without record of the owner's name; payment is made to whoever holds the bond.
(See Refer to page 204)
Bond Refunding  The process of replacing all or part of an issue of outstanding bonds.
(See Refer to page 227)
Call Premium  Amount by which the call price exceeds the par value of the bond.
(See Refer to page 205)
Call Protected  Bond during period in which it cannot be redeemed by the issuer.
(See Refer to page 205)
Call Provision  Agreement giving the corporation the option to repurchase the bond at a specified price before maturity.
(See Refer to page 205)
Canada Plus Call  Call provision which compensates bond investors for interest differential making call unattractive for issuer.
(See Refer to page 205)
Canada Yield Curve  A plot of the yields on Government of Canada bonds relative to maturity.
(See Refer to page 218)
Coupon Rate  The annual coupon divided by the face value of a bond.
(See Refer to page 194)
Coupons  The stated interest payments made on a bond.
(See Refer to page 194)
Debenture  Unsecured debt, usually with a maturity of 10 years or more.
(See Refer to page 204)
Default Risk Premium  The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.
(See Refer to page 219)
Deferred Call  Call provision prohibiting the company from redeeming the bond before a certain date.
(See Refer to page 205)
Face Value  The principal amount of a bond that is repaid at the end of the term. Also par value.
(See Refer to page 194)
Fisher Effect  Relationship between nominal returns, real returns, and inflation.
(See Refer to page 215)
Indenture  Written agreement between the corporation and the lender detailing the terms of the debt issue.
(See Refer to page 203)
Inflation Premium  The portion of a nominal interest rate that represents compensation for expected future inflation.
(See Refer to page 217)
Interest Rate Risk Premium  The compensation investors demand for bearing interest rate risk.
(See Refer to page 217)
Liquidity Premium  The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.
(See Refer to page 219)
Maturity  Specified date at which the principal amount of a bond is paid.
(See Refer to page 194)
Nominal Rate of Interest  The stated rate of interest applied to your investment.
(See Refer to page 214)
Note  Unsecured debt, usually with a maturity under 10 years.
(See Refer to page 204)
Protective Covenant  Part of the indenture limiting certain transactions that can be taken during the term of the loan, usually to protect the lender's interest.
(See Refer to page 206)
Real Interest Rate  The nominal interest rate minus the rate of inflation.
(See Refer to page 214)
Registered Form  Registrar of company records ownership of each bond; payment is made directly to the owner of record.
(See Refer to page 204)
Retractable Bond  Bond that may be sold back (put) to the issuer at a prespecified price before maturity.
(See Refer to page 211)
Sinking Fund  Account managed by the bond trustee for early bond redemption.
(See Refer to page 205)
Stripped Bond  A bond that makes no coupon payments, thus initially priced at a deep discount.
(See Refer to page 210)
Term Structure of Interest Rates  The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.
(See Refer to page 216)
Yield to Maturity (YTM)  The market interest rate that equates a bond's present value of interest payments and principal repayment with its price.
(See Refer to page 194)