Bonds Flashcards
Define interest
The cost of borrowing money
Define principal
Original loan amount; face value
How will a company doing poorly compensate to make a bond more marketable?
Make it have a higher interest rate
If a bond is safe, will the interest rate be higher or lower?
Lower
What is the difference between dividends in bonds and stocks?
With bonds they can’t skip dividends
What are three names for the interest rate of a bond?
- coupon
- Stated rate
- Rate
What does it mean that bonds were in “bearer form”
Whoever holds the bond owns it (like cash)
Who records a bond purchase and where/how is it entered?
Transfer agent enters it into book-entry form
What does J&J 1 mean?
Pays interest on Jan 1st and July 1st
What does F & A 15 mean?
Pays interest on fb 15 and august 15
What are zero coupon bonds?
Bonds with no interest rate
What is the maturity date?
When the issuer pays
What two things does the issuer pay on maturity date?
- One final interest payment
- Principal
What is capital appreciation?
When zero coupon bonds are returned in full at maturity
What is a discount for a bond?
Any price below par
What is par usually for a bond?
1000
What is a premium for a bond?
Any price above par
Two characteristics of Short-term maturities
- Safer than long-term bonds
- Lower rates of return
What is default risk in bonds?
The risk of not being repaid
Which type of bond is less risky?
Short term bonds
Do interest payments for bonds need to be approved by BOD?
NO
What is a money market security?
Type of bond with one year or less to maturity
What is the investor of a bond named?
Creditor
What type of bond has a deeper discount which results in longer maturities?
Zero coupon
What are the two types of “backing” for bonds?
- Secured
- Full faith and credit
What does it mean if a bond is collateralized?
A tangible collateral backs the loan
What is an example of a secured collateralized loan?
Cars or houses
What is one type of collateralized bond a corporation issues?
- Mortgage bond
What is a mortgage bond?
Bond backed by the physical factory owned by the business
What are full faith and credit bonds backed by?
The issuer’s promise to repay the borrowed funds
Which type of bond (secured, unsecured) has higher returns and why?
Unsecured, to compensate bondholders for the risk they’re exposed to
What three things are issuers required to pay when a bond is called?
- accrued interest
- par value
- ANy call premium
What is the most common reason to reason to call a bond?
To refinance it
In what environment are bonds usually called?
When interest rates fall
Why do callable bonds trade with higher rates in the secondary market?
Because they are less desirable
What is call protection?
Restriction on years before a bond can be called
What is a call premium?
Amount of money above par an issuer must pay to call the bond
When would an investor Put a bond?
When interest rates rise
Two ways issuers can call a bond before its maturity?
- buy back bonds in the secondary market
- Tender offer
What is a put feature in bonds?
Allow bondholders to sell bonds back to the issuer for the par value plus any accrued interest before maturity
when would put features be attractive to investors and why?
When interest rates rise because they will be able to get a new bond with a higher interest rate
Why do bonds with lower interest rates have lower market price in the secondary market?
Because they are less desirable
How does the yield change based on the desirability of a bond in the market place?
The less desirable, the higher the yield
How are putable bonds safer for investors?
If interest rates rise, and the bond becomes less valuable, you can sell it back to the issuer at the original par value!
When are put features used?
When interest rates are high
What must the issuer pay if a put is exercised?
Accrued interest plus par to the bondholder
What does it mean and how much is a bond that is trading “at 105 in the market”
It means that it is trading at 105% of the par ($1000)
What are the 3 types of bond issue formats?
- Term
- Serial
- Series
What are term bonds?
All bonds issued on the same day and mature on the same day
What are serial bonds?
All bonds issued on the same day, but mature on different days
What are series bonds?
Bonds issued on different days but all mature on the same day
What format are bonds issued by corporate and US government in?
Term format
What format are municipal bonds issued?
Serial format
What format of bonds are construction-related projects issued in?
Series format
What are balloon maturities?
A type of serial issuance where the largest portion matures at the final redemption
What is a bond quote?
Provides trading information
How are term bonds quoted?
In percentage of par
How are serial bonds quoted?
Yield form
What are three other words for bond Price Quote
- Dollar
- Term quote
- Percentage of par quote
What are two other words for yield quote?
- Serial quotes
- Basis quotes
How much is 1 basis point?
.01 percent
What does a basis quote refer to?
Refers to a bond’s yield
Who keeps unsold securities in best efforts underwriting?
The issuer
What are the two forms of return the bond buyer receivies?
- Ongoing semi-annual interest
- Receives the difference between the purchase price and the face value
What is the benefit and drawback of buying a bond at a premium (above par)?
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
