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Unit 2 > Bonds > Flashcards

Bonds Flashcards

1
Q

Define interest

A

The cost of borrowing money

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2
Q

Define principal

A

Original loan amount; face value

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3
Q

How will a company doing poorly compensate to make a bond more marketable?

A

Make it have a higher interest rate

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4
Q

If a bond is safe, will the interest rate be higher or lower?

A

Lower

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5
Q

What is the difference between dividends in bonds and stocks?

A

With bonds they can’t skip dividends

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6
Q

What are three names for the interest rate of a bond?

A
  1. coupon
  2. Stated rate
  3. Rate
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7
Q

What does it mean that bonds were in “bearer form”

A

Whoever holds the bond owns it (like cash)

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8
Q

Who records a bond purchase and where/how is it entered?

A

Transfer agent enters it into book-entry form

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9
Q

What does J&J 1 mean?

A

Pays interest on Jan 1st and July 1st

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10
Q

What does F & A 15 mean?

A

Pays interest on fb 15 and august 15

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11
Q

What are zero coupon bonds?

A

Bonds with no interest rate

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12
Q

What is the maturity date?

A

When the issuer pays

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13
Q

What two things does the issuer pay on maturity date?

A
  1. One final interest payment
  2. Principal
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14
Q

What is capital appreciation?

A

When zero coupon bonds are returned in full at maturity

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15
Q

What is a discount for a bond?

A

Any price below par

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16
Q

What is par usually for a bond?

A

1000

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17
Q

What is a premium for a bond?

A

Any price above par

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18
Q

Two characteristics of Short-term maturities

A
  1. Safer than long-term bonds
  2. Lower rates of return
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19
Q

What is default risk in bonds?

A

The risk of not being repaid

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20
Q

Which type of bond is less risky?

A

Short term bonds

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21
Q

Do interest payments for bonds need to be approved by BOD?

A

NO

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22
Q

What is a money market security?

A

Type of bond with one year or less to maturity

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23
Q

What is the investor of a bond named?

A

Creditor

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24
Q

What type of bond has a deeper discount which results in longer maturities?

A

Zero coupon

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25
Q

What are the two types of “backing” for bonds?

A
  1. Secured
  2. Full faith and credit
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26
Q

What does it mean if a bond is collateralized?

A

A tangible collateral backs the loan

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27
Q

What is an example of a secured collateralized loan?

A

Cars or houses

28
Q

What is one type of collateralized bond a corporation issues?

A
  1. Mortgage bond
29
Q

What is a mortgage bond?

A

Bond backed by the physical factory owned by the business

30
Q

What are full faith and credit bonds backed by?

A

The issuer’s promise to repay the borrowed funds

31
Q

Which type of bond (secured, unsecured) has higher returns and why?

A

Unsecured, to compensate bondholders for the risk they’re exposed to

32
Q

What three things are issuers required to pay when a bond is called?

A
  1. accrued interest
  2. par value
  3. ANy call premium
33
Q

What is the most common reason to reason to call a bond?

A

To refinance it

34
Q

In what environment are bonds usually called?

A

When interest rates fall

35
Q

Why do callable bonds trade with higher rates in the secondary market?

A

Because they are less desirable

36
Q

What is call protection?

A

Restriction on years before a bond can be called

37
Q

What is a call premium?

A

Amount of money above par an issuer must pay to call the bond

38
Q

When would an investor Put a bond?

A

When interest rates rise

39
Q

Two ways issuers can call a bond before its maturity?

A
  1. buy back bonds in the secondary market
  2. Tender offer
40
Q

What is a put feature in bonds?

A

Allow bondholders to sell bonds back to the issuer for the par value plus any accrued interest before maturity

41
Q

when would put features be attractive to investors and why?

A

When interest rates rise because they will be able to get a new bond with a higher interest rate

42
Q

Why do bonds with lower interest rates have lower market price in the secondary market?

A

Because they are less desirable

43
Q

How does the yield change based on the desirability of a bond in the market place?

A

The less desirable, the higher the yield

44
Q

How are putable bonds safer for investors?

A

If interest rates rise, and the bond becomes less valuable, you can sell it back to the issuer at the original par value!

45
Q

When are put features used?

A

When interest rates are high

46
Q

What must the issuer pay if a put is exercised?

A

Accrued interest plus par to the bondholder

47
Q

What does it mean and how much is a bond that is trading “at 105 in the market”

A

It means that it is trading at 105% of the par ($1000)

48
Q

What are the 3 types of bond issue formats?

A
  1. Term
  2. Serial
  3. Series
49
Q

What are term bonds?

A

All bonds issued on the same day and mature on the same day

50
Q

What are serial bonds?

A

All bonds issued on the same day, but mature on different days

51
Q

What are series bonds?

A

Bonds issued on different days but all mature on the same day

52
Q

What format are bonds issued by corporate and US government in?

A

Term format

53
Q

What format are municipal bonds issued?

A

Serial format

54
Q

What format of bonds are construction-related projects issued in?

A

Series format

55
Q

What are balloon maturities?

A

A type of serial issuance where the largest portion matures at the final redemption

56
Q

What is a bond quote?

A

Provides trading information

57
Q

How are term bonds quoted?

A

In percentage of par

58
Q

How are serial bonds quoted?

A

Yield form

59
Q

What are three other words for bond Price Quote

A
  1. Dollar
  2. Term quote
  3. Percentage of par quote
60
Q

What are two other words for yield quote?

A
  1. Serial quotes
  2. Basis quotes
61
Q

How much is 1 basis point?

A

.01 percent

62
Q

What does a basis quote refer to?

A

Refers to a bond’s yield

63
Q

Who keeps unsold securities in best efforts underwriting?

A

The issuer

64
Q

What are the two forms of return the bond buyer receivies?

A
  1. Ongoing semi-annual interest
  2. Receives the difference between the purchase price and the face value
65
Q

What is the benefit and drawback of buying a bond at a premium (above par)?

A

The premium bond pays a higher semi-annual interest, but when the bond matures, you lose the difference between the purchase price and what you bought it for

66
Q
A

Unit 2 (18 decks)

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