Bond Markets

Question 1

Characteristics of bond markets

Answer 1

-Maturity > 1 year
- Exposed to more price volatility = higher return
They are OBLIGATIONS characterized by a face value and a coupon rate

Question 2

Characteristics of Treasury bonds

Answer 2

• Issued by the government
• Maturity of 1-10yrs
• Low risk, low return
• principal can be fixed of inflation-indexed

Question 3

What is the difference between on and off the run bonds?

Answer 3

On the run = newly issued, more liquid

Off the run = old bonds, less liquid

Question 4

What is the difference between a fixed and an inflation-indexed principal?

Answer 4

Fixed = NOT adjusted according to inflation

Inflation indexed = adjusted according to inflation, it is a protection for the holder

Question 5

Characteristics of STRIPS

Answer 5

Strips are T-bonds that after being purchased by a FI, is divided between two securities: zero coupon bonds:

• Semi-annual payments
• principal payment

Question 6

What is a dirt and clean price?

Answer 6

Dirty price = face value + ACCRUED interest –> the one you pay
Clean price = dirty price - accrued interest –> what you will receive

Question 7

Characteristics of corporate bonds

Answer 7

Issued by corporations and include a INDENTURE = legal contract that specifies the duties and rights of the holder and of the issuer.
COVENANTS = clauses that specifies the bond issuer’s rules and obligations

Question 8

What is a bond trustee?

Answer 8

Monitor the company to make sure everything is going smoothly

Question 9

What is a transfer agent?

Answer 9

Tracks the ownership of the bond

Question 10

What are the bond dimensions (no explanation)

Answer 10

1. Bearer vs. registered
2. Term vs serial
3. Mortgage bonds
4. Debentures vs junior debentures
5. Convertible bonds
6. Bonds with stock warrants
7. Callable bonds
8. Sinking fund provisions

Question 11

Difference between bearer and registered bonds

Answer 11

Bearer = physical payment 
Registered = automatic payment

Question 12

Difference between term and serial issues?

Answer 12

Term = same maturity for the whole issue (risky because the company might not have all the capital to cover the face value payments) 
Serial = different maturities within the issue

Question 13

Difference between Debentures and junior debentures

Answer 13

Debentures = secured loans, backed up by the credit worthiness of the issuer 
Junior = behind in payment and not secured

Question 14

What are mortgage bonds ?

Answer 14

Bonds that are backed by a real estate property. Considered safe, so lower returns.
Equipment trust certificate = backed up by a movable asset

Question 15

What are convertible bonds?

Answer 15

The holder of these bonds have the option to convert these bonds into common stock at a certain time/price. It is done when P market> P agreed
Conversion ratio = number of securities for one bond
Lower yield

Question 16

What are bonds with stock warrant?

Answer 16

The holder of bonds have the right to buy common stock at a certain price/time. Risky firms attach warrants to their bonds to be more attractive for investors. At the end the investor will have their original bonds + common stock bought.

Question 17

What are callable bonds?

Answer 17

Bonds that can be called by the issuer at any time. They usually do so when the interest rate lowers, so the bond price will grow and they will be able to sell at the market for a higher price. Since it is not attractive for investors, they have a higher return

Question 18

What are sinking fund provisions?

Answer 18

Every period the company sets aside some money to cover the face value payment for their bonds. This makes them more secure, so they have lower returns.

Question 19

What are split ratings?

Answer 19

When rating companies rate bonds differently

Question 20

What are junk bonds?

Answer 20

Low rated bonds, risky ones, with a high return

Question 21

What are eurobonds?

Answer 21

Bonds issued in the home country, but with a foreign currency denomination

Question 22

What are foreign bonds?

Answer 22

Bonds issued abroad, usually with the foreign currency’s denomination

Question 23

What are sovereign bonds?

Answer 23

Government bonds issued outside from the home country.