MGFB10H3 Chapter Notes - Chapter 6: Liquidity Preference, Interest Rate Parity, Credit Risk

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Bonds: long-term debt instruments that promise fixed payments and have maturities of longer than 7 years: major source of financing for companies. Notes: bonds with maturities b/w one and seven years. Bills or paper: short-term bonds w/ a maturity of less than one year. Key feature of bond is that the issuer agrees to pay the bondholder (investor) a regular series of cash payments and to repay the full principal amount by maturity date. Although many payment structures are possible, the traditional coupon-paying bond provides for identical payments at regular intervals (usually semi-annually or annually) with the full principal to be repaid at the stated maturity rate. Bullet payment/ balloon payment: a principal payment made in one lump sum at maturity. Bonds are not referred to as fixed income securities b/c the interest payments and the principal repayment are specified or fixed at the time the bond is issued.

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