discounting | the compound reduction from FV to PV |
compounding | the earning of interest on interest |
compound interest | interest earned in subsequent periods on the interest earned in previous periods |
lump-sum payment | one time payment at a PV or FV |
TVM | key value that a dollar today is worth more than a dollar tomorrow |
amortization schedule | listing of periodic interest expense, reduction in principal each period, ending balance for each period |
amortized loan | loan in which interest and principal is paid each period |
annuity | series of equal cash flows at regular intervals across time |
annuity due | series of equal & regular pmts at the beginning of a period |
console (perpetual bonds) | stocks that pay interest forever, no maturity date, no promise to pay principal |
discount loan | loan where interest & principal is repaid at maturity |
interest only loan | loan where interest is paid regularly. principal & final interest is paid at date due. |
perpetuity | infinite regular & equal pmts |
APR | yearly uncompounded rate of interest |
EAR (effective annual rate) | compound rate of interest per year |
compounding period | period in which interest is applied |
fisher effect | relationship which nominal interest rate is a function of the real rate, inflation, and product of inflation and real rate |
maturity premium | the portion of the nominal interest rate that compensates the investor for additional waiting time to receive payment in full |
nominal interest rate | interest rate composed of real interest rate plus the inflation rate |
periodic interest rate | the number of compounding periods per year |
real interest rate | the reward for waiting |
reward for waiting | real rate of interest paid for forgoing use of money today. |
risk free rate | theoretical interest rate with zero risk of any kind |
yield curve | graph relating return rate and an asset's time to maturity |
basis point | one hundredth of a percentage point |
bearer bond | bond where ownership to the possessor |
Bone equivalent yield (BEY) | annual % rate converted from bank discount rate on a treasury bill |
callable bond | bond that issuer has the right to buy back prior to maturity at a predetermined price |
convertible bond | right to swap bond for another asset, usually common stock, at a preset conversion ratio under certain conditions |
corpus | bond with the coupons clipped off representing only principal |
coupon | regular interest pmt of bond |
current yield | annual bond coupon pmt divided by current price |
debentures | unsecured bonds |
floating rate bond | bond with changing coupon rate |
indenture | formal contract of a bond detailing important information |
junor debt | debt subsequent to the other (senior) debt with lower priority of pmt |
par value | principal amount to be paid at the maturity date |
premium bond | bond that current value is above par value |
prime rate | interest rate banks charge their best customers |
protective covenant | part of the bond that spells out both required and prohibited actions of the bond issuer |
putable bond | bond holder has the right to sell the bond back to the issuer at a determined price prior to maturity |
sinking fund | special fund for the retirement of debt on bonds |
STRIPS | zero-coupon bonds made by separating the interest and principal on us. govt bonds |
treasury bill | govt bond with a maturity less than one year |
treasury bond | govt bond with maturity of more than ten years |
treasury note | govt bond with a maturity between 2 and 10 years |
yield to call | discount rate of return for a callable premium bond |
yield to maturity (YTM) | return the holder receives if held on till maturity |
zero-coupon bond | a bond that pays no coupons over its maturity |
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