3. Bonds Flashcards
PAR value of a Bond
Principle of a Bond
$1,000
vs. PAR of a Stock = $100
Definition & characteristics of BONDS
Loans to Public Corporation, Federal Gov or a municipality
Different from common & preferred stock - Not ownership, but a debt obligation.
Classified as DEBT SECURITY
Investor = creditor who receives interest payments
Coupon Rate =
*Interest rate of a bond
*fixed rate stated as a % of the par value of the bond
*interest on bonds is paid semi-annually (twice a year)
e.g. Coupon Rate = 8%
.08 x 1,000 = $80 - received in two $40 payments each year
Point on a Bond
$10, .001% of Par ($1,000)
Point on a Stock = $1, 1% of Par ($100)
Maturity Date
Date the Principle ($1,000) is repaid to the investor
Three Bond trade levels
A Discount - under par value
Par - market price = actual par value ($1,000)
A Premium - Bond’s market price is more than par value
Bond symbol “M” = ?
M is the Roman numeral for 1,000
5M = 5,000
Bond Structures (how corporations may structure their bond debts)
Series Bonds - different issue dates, same term/maturity date
Term Bonds - entire issue has same maturity date
Sinking Fund - Money set aside to redeem a company’s bonds, debentures or preferred stock (insures capital available when a term arrives - Term Bonds)
Serial Bonds - 1 issue date with staggered maturity dates. interest costs to issuer go down over the life of the bonds
Funded Debt - Corporate Bond (not preferred stock, gov or muni bonds) due more than 1 year from issue date
Bond issue systems
- Registered *Registered “as to Principal Only”
- Bearer *Book Entry Form
- Registered = in investor’s name, interest payments sent directly to investor
- Bearer - Not registered in investor’s name, redeemable interest coupons
- Registered “as to Principal Only” Registered in investor’s name with redeemable coupons
- Book Entry Form - electronic registration, covered online
Current Yield on a Bond Formula
Current Yield = Annual Interest / Market Price = CY
An investor purchases a 9% bond @ 90. What is the current yield?
Bonds trading at a discount (Par = 1,000) yield will always be higher than coupon rate.
9% of Par ($1,000) = $90; Divided by the discount Par ($900) = $10
Yield to Maturity (or Basis) Formula
Purchase Price
Redemption value
Coupon Rate
Time to Maturity
Formula to calculate Corporate Bond’s dollar value
e.g. 102 3/8
(102 x 10) + (3 divided by 8 x 10) = 1,023.75
1020 3.75
Formula for computing $$ dollar amount of a Bond’s accrued interest
(Principle x Rate x Time)
Divided by…
360
Formula for calculating the Conversion Price for a convertible bond or preferred stock to Common Stock
Par Value
-----divided by-----
Common Shares Produced
=
Conversion Price
