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Exam 9 Flashcard > BKM 14: Bonds > Flashcards

BKM 14: Bonds Flashcards

1
Q

Par value

A

Face value of bond

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2
Q

Coupon rate

A

Interest payment on bond

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3
Q

Bond indenture

A

Contract between issuer and bondholder

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4
Q

Accrued interest on bonds

A

If bond purchased between coupon payments, buyer must pay seller for accrued interest

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5
Q

Callable bonds

A

Issued with call provisions allowing issuer to repurchase bond at specified call price; issued wiht higher coupons and promised YTMs than noncallables

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6
Q

Convertible bonds

A

Gives bondholder option to exchange each bond for a specified number of common stock shares; lower coupons and stated or promised YTMs

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7
Q

Conversion ratio

A

Ratio of shares for which each convertible bond can be exchanged

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8
Q

Market conversion value

A

Current value of shares for which a convertible bond may be exchanged; conversion premium is excess of bond value over conversion value

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9
Q

Puttable bond

A

Gives option to bondholder to extend or retire bond at the put date

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10
Q

Floating-rate bonds

A

Make interest payments tied to some measure of current market rates; not adjusted for changes in financial condition of the firm

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11
Q

Preferred stock

A

Receive dividends before common stockholders

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12
Q

Foreign bond

A

Issued by a borrower from a country other than the one in which it is sold; denominated in marketed country’s currency

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13
Q

Examples of foreign bonds

A

Yankee (foreign sold in US)

Samurai (foreign sold in Japan)

Bulldog (sold in UK)

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14
Q

Eurobonds

A

Denominated in one currency but sold in other national markets

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15
Q

Examples of Eurobonds

A

Eurodollar ($-denominated sold outside US)

Euroyen (yen-denominated selling outside of Japan)

Eurosterling (UK)

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16
Q

Inverse floaters

A

Coupon rate falls when general level of interest rates rise

17
Q

Indexed bonds

A

Make payments tied to a general price index (ex: inflation)

18
Q

Nominal rate of return

A

(Interest + appreciation)/price

19
Q

Real return

A

(1 + Nominal) / (1 + Inflation) - 1

20
Q

Bond value in financial calculator

A
21
Q

Convexity

A

Progressive increases in interest rate result in progressively smaller reductions in bond price

22
Q

Yield to Maturity

A

Interest rate that makes PV of bond’s payments equal to price

23
Q

Current yield

A

Annual coupon payment divided by bond price

24
Q

Rule for bonds: coupon rate, current yield, and YTM

A

For premium bonds, coupon rate > current yield > YTM

25
Q

Yield to call

A

Just like YTM, except time to first call replaces time until maturity

26
Q

Realized compound return

A

Return realized at maturity date (not forecast)

27
Q

Offsetting risk of bonds as interest rates change

A
  1. When rates rise, bond prices fall
  2. When rates rise, coupons reinvested at higher rate
28
Q

Imputed interest

A

IRS method to determine tax; uses constant yield method (implied return vs. actual return)

29
Q

Credit risk

A

Risk of bond default

30
Q

Junk bonds

A

“Fallen angels” - originally investment grade

“Original-issue junk”

31
Q

Key ratios to evaluate bond safety

A
  1. Earnings to fixed costs (coverage)
  2. Leverage ratio, debt-to-equity ratio
  3. Liquidity ratios (current, quick)
  4. Profitability ratios
  5. Cash flow to debt ratio
32
Q

Altman ratio (bonds)

A

1.23 (bad) - 2.9 (safe)

33
Q

Sinking fund

A

Spreads payment of debt over several years

34
Q

Subordination of further debt

A

Restricts amount of additional borrowing

35
Q

Bond indenture examples

A

Sinking funds

Subordination of further debt

Dividend restrictions

Collateral

36
Q

Default premium

A

Difference between promised yield and yield of an otherwise-identical government bond

37
Q

Credit default swap

A

An insurance policy on the default risk of a bond or loan; can effectively raise the quality of debt from lower to AAA

Premium on swap should approximate yield spread

Now used to speculate on issuer’s financial health

38
Q

Collateralized debt obligation

A

Tool to reallocate credit risk by pooling and then tranching; used to create high-rated bonds from junk bonds

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