All information contained in past price movements is fully reflected in current market prices. (NOTE: Most studies suggest the market is highly efficient in this form.)
Current market prices reflect all publicly available information. (NOTE: Most studies suggest the market is reasonably efficient in this form.)
Current market prices reflect all pertinent information, whether publicly available or privately held. (NOTE: Evidence suggests this form does not hold since individuals have made abnormal profits trading on inside information.)
Risk that the stock price will decline due to random events that affect a particular firm (e.g., strike, lawsuit, unsuccessful marketing campaign, losing major customer).
Risk that the stock price will decline due to factors that systematically affect most firms (e.g, inflation, recession, high interest rates, high tax rates).
Principal or face value of bond. Represents the amount of money to be repaid. Most corporate bonds are issued in $1,000 units. Repayment is usually made in one lump-sum payment or in serial payments over the life of the bond.
The final date on which repayment of the bond principal is due.
Actual interest rate paid, usually in semi-annual installments. Stated as a percentage of the par value. May have a fixed, floating, or zero coupon.
Usually include (1) conditions under which issuer can pay off the bonds prior to maturity, (2) the levels at which certain ratios must be maintained if the company is to issue additional debt, and (3) restrictions against the payment of dividends unless earnings meet certain specifications.
Specific assets are pledged to the bondholders in the event of default (e.g., mortgage bond). May be either senior or junior. (NOTE: If a bond is unsecured, it is called a debenture, which may be either senior or subordinated.)
Contributions are made to a fund each year and the trustee of the fund finds investors willing to sell back their bonds, so they can be retired.
Sinking fund provision
Pay guaranteed by another firm other than the issuer.
Gives the issuer the right to call the bonds in prior to the maturity date and force retirement of the issue. However, investors typically receive a call premium in compensation for early retirement.
Gives the bondholder the right to sell the bond back to the issuer prior to the maturity date at a predetermined price (usually par value). However, investors typically earn a lower rate of return to have this advantage.
Bond may be converted into a predetermined number of shares of common stock (usually at the discretion of the bondholder).
Gives bondholder option to purchase a specified number of shares of common stock at a fixed price.