Economics Bonds Study Cards

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Bond

A fixed income investment where an investor loans money to an entity, typically a government or corporation, for a defined period of time at a fixed interest rate.

Coupon Rate

The fixed interest rate that a bond issuer pays to bondholders periodically, usually annually or semi-annually, based on the bond's face value.

Maturity Date

The date on which the principal amount of a bond becomes due and is repaid to the bondholder.

Yield to Maturity

The total return anticipated on a bond if it is held until its maturity date, taking into account the bond's current market price, coupon rate, and time to maturity.

Yield Curve

A graphical representation of the relationship between the yield on bonds of the same credit quality but different maturities.

Inverted Yield Curve

A yield curve in which shorter-term bonds have higher yields than longer-term bonds, indicating market expectations of an economic downturn.

Bond Pricing

The process of determining the fair value of a bond, taking into account factors such as coupon rate, yield to maturity, and market interest rates.

Bond Ratings

Assessments of the creditworthiness of a bond issuer, indicating the likelihood of default and the risk associated with investing in the bond.

Investment Grade

Bonds that are considered to have a relatively low risk of default, typically assigned ratings of 'AAA' to 'BBB-' by credit rating agencies.

Junk Bonds

High-yield bonds with lower credit ratings, indicating a higher risk of default but offering higher interest rates to compensate investors for the increased risk.

Secondary Market

The market where previously issued bonds are bought and sold among investors, rather than directly from the bond issuer.

Primary Market

The market where newly issued bonds are sold by the bond issuer to investors for the first time.

Interest Rate Risk

The risk that changes in market interest rates will affect the value of a bond, with bond prices generally falling when interest rates rise and vice versa.

Credit Risk

The risk that a bond issuer will default on its payment obligations, resulting in a loss of principal and interest for bondholders.

Callable Bonds

Bonds that can be redeemed by the issuer before their maturity date, typically when interest rates have fallen, allowing the issuer to refinance at a lower cost.

Puttable Bonds

Bonds that give bondholders the right to sell the bond back to the issuer before its maturity date, typically at par value.

Convertible Bonds

Bonds that can be converted into a specified number of shares of the issuer's common stock, providing bondholders with the opportunity to participate in potential stock price appreciation.

Zero-Coupon Bonds

Bonds that do not pay periodic interest payments, but are sold at a discount to their face value and provide a return to investors through capital appreciation.

Duration

A measure of a bond's price sensitivity to changes in interest rates, representing the weighted average time until the bond's cash flows are received.

Modified Duration

A modified version of duration that takes into account the bond's yield, providing a more accurate measure of price sensitivity to interest rate changes.

Macaulay Duration

A measure of a bond's price sensitivity to changes in interest rates, calculated as the weighted average time until the bond's cash flows are received, divided by the bond's current price.

Convexity

A measure of the curvature of the relationship between a bond's price and its yield, indicating how the bond's price changes in response to changes in interest rates.

Bond Valuation

The process of determining the fair value of a bond based on its expected future cash flows, discounting them back to their present value using an appropriate discount rate.

Discount Bond

A bond that is priced below its face value, resulting in a yield to maturity that is higher than the bond's coupon rate.

Premium Bond

A bond that is priced above its face value, resulting in a yield to maturity that is lower than the bond's coupon rate.

Par Bond

A bond that is priced at its face value, resulting in a yield to maturity that is equal to the bond's coupon rate.

Bond Issuance

The process of a bond issuer offering and selling bonds to investors, typically through an underwriting syndicate or investment bank.

Coupon Payment

The periodic interest payment made by a bond issuer to bondholders, based on the bond's coupon rate and face value.

Face Value

The nominal value of a bond, typically the amount that will be repaid to the bondholder at the bond's maturity date.

Current Yield

The annual income generated by a bond, expressed as a percentage of its current market price.

Bond Yield

The return on investment generated by a bond, taking into account both the periodic interest payments and any capital gains or losses upon sale or maturity.

Callable Bond Risk

The risk that a callable bond will be redeemed by the issuer before its maturity date, resulting in a loss of future interest payments for bondholders.

Puttable Bond Risk

The risk that a puttable bond will be sold back to the issuer before its maturity date, resulting in a loss of future interest payments for bondholders.

Convertible Bond Risk

The risk that a convertible bond will be converted into shares of the issuer's common stock, resulting in a loss of future interest payments for bondholders.

Zero-Coupon Bond Risk

The risk that a zero-coupon bond will not provide any periodic interest payments, relying solely on capital appreciation for its return.

Sovereign Bonds

Bonds issued by national governments, typically considered to have the lowest credit risk due to the backing of the government's taxing authority.

Corporate Bonds

Bonds issued by corporations to raise capital, typically offering higher yields than government bonds to compensate investors for the increased credit risk.

Municipal Bonds

Bonds issued by state and local governments to finance public projects, typically offering tax advantages to investors in the form of tax-exempt interest payments.

Agency Bonds

Bonds issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, typically considered to have a lower credit risk than corporate bonds.

Collateralized Debt Obligations (CDOs)

Securities backed by a pool of bonds, loans, or other debt instruments, typically divided into different tranches with varying levels of credit risk and potential returns.

Credit Default Swap (CDS)

A financial derivative that allows investors to transfer the credit risk of a bond or other debt instrument to another party in exchange for periodic premium payments.

Bond Indenture

A legal contract between the bond issuer and bondholders that outlines the terms and conditions of the bond, including the coupon rate, maturity date, and repayment terms.

Covenant

A provision in a bond indenture that imposes certain restrictions or obligations on the bond issuer, designed to protect the interests of bondholders.

Default Risk

The risk that a bond issuer will fail to make timely payments of interest or principal, resulting in a loss of income or principal for bondholders.

Reinvestment Risk

The risk that future cash flows from a bond, such as coupon payments or principal repayments, will need to be reinvested at lower interest rates, resulting in a lower overall return.

Liquidity Risk

The risk that a bond cannot be easily bought or sold in the market without significantly impacting its price, potentially resulting in a loss for bondholders.

Inflation Risk

The risk that inflation will erode the purchasing power of a bond's future cash flows, reducing the real return on investment for bondholders.

Market Risk

The risk that overall market conditions, such as economic downturns or financial crises, will negatively impact the value of a bond, regardless of its specific characteristics.

Call Risk

The risk that a callable bond will be redeemed by the issuer before its maturity date, resulting in a loss of future interest payments for bondholders.

Put Risk

The risk that a puttable bond will be sold back to the issuer before its maturity date, resulting in a loss of future interest payments for bondholders.

Conversion Risk

The risk that a convertible bond will be converted into shares of the issuer's common stock, resulting in a loss of future interest payments for bondholders.