Bond Basics

Question 1

Bond par value

Answer 1

$1,000

Question 2

Bond maturity date

Answer 2

The date the investor receives the loan principal back.

Question 3

Term Bond

Answer 3

Structured so the principal of the whole bond issues at maturity.

Question 4

Serial Bond

Answer 4

Schedules portion of the principal to mature at intervals over a period of years until the entire balance has been repaid.

Question 5

Balloon Bond

Answer 5

Using both serial and term maturity elements, the issuer repays part of the bond’s principal before the final maturity date but a bulk of the principal at the maturity.

Question 6

Coupon

Answer 6

The interest rate the issuer has agreed to pay the investor at the time of sale. This is fixed. Also called stated yield or nominal yield,

Question 7

How do you calculate the stated yield?

Answer 7

Stated as a percentage of Par Value of the Bond, taking a stated yield (or coupon) of 6% pays $60 in interest per year. (0.06 x 1000)

Question 8

How must accrued interest be dealt with during a bond sale?

Answer 8

The buyer must pay the seller the interest accrued to date at the time of settlement. The new owner will receive the full coupon during the next cycle.

Question 9

What calendar do Corporate and Municipal Trades use for accrued interest?

Answer 9

30 day month/360 day year

Question 10

What calendar do treasury bonds and notes employ for accrued interest calculations?

Answer 10

Actual number of days elapsed.

Question 11

How do you get the value of a bond trading?

Answer 11

Multiply the quoted price by 10. I.e. bond trading at 90 is worth $900.

Question 12

What market forces impact bonds?

Answer 12

Supply and Demand

Market Interest Rates

Question 13

Yield

Answer 13

Expresses the cash interest payments in relation to the bond’s value.

Question 14

Nominal Yield

Answer 14

Coupon, States Yield - this is fixed and odes not change from time of issue.

Question 15

Current Yield (CY)

Answer 15

Measures a bond’s annual coupon payment relative to it’s market price :
annual coupon payment / market price = CY

Question 16

Yield to Maturity (YTM)

Answer 16

reflects the annualized return of the bond if held to maturity. Must take into account the difference between paid price for bond and par value received when bond matures. Discount at purchase = more value at maturity, premium at purchase = loss at maturity.

Question 17

A bond trading on the basis of a quoted yield, is discussing

Answer 17

Yield to Maturity

Question 18

Basis Point

Answer 18

measurement of yield equal to 1/100 of 1%, a full basis point is made of 100 basis points. (bps).