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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
What are the two types of "backing" for bonds?
1. Secured 2. Full faith and credit
26
What does it mean if a bond is collateralized?
A tangible collateral backs the loan
27
What is an example of a secured collateralized loan?
Cars or houses
28
What is one type of collateralized bond a corporation issues?
1. Mortgage bond
29
What is a mortgage bond?
Bond backed by the physical factory owned by the business
30
What are full faith and credit bonds backed by?
The issuer's promise to repay the borrowed funds
31
Which type of bond (secured, unsecured) has higher returns and why?
Unsecured, to compensate bondholders for the risk they're exposed to
32
What three things are issuers required to pay when a bond is called?
1. accrued interest 2. par value 3. ANy call premium
33
What is the most common reason to reason to call a bond?
To refinance it
34
In what environment are bonds usually called?
When interest rates fall
35
Why do callable bonds trade with higher rates in the secondary market?
Because they are less desirable
36
What is call protection?
Restriction on years before a bond can be called
37
What is a call premium?
Amount of money above par an issuer must pay to call the bond
38
When would an investor Put a bond?
When interest rates rise
39
Two ways issuers can call a bond before its maturity?
1. buy back bonds in the secondary market 2. Tender offer
40
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
41
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
42
Why do bonds with lower interest rates have lower market price in the secondary market?
Because they are less desirable
43
How does the yield change based on the desirability of a bond in the market place?
The less desirable, the higher the yield
44
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!
45
When are put features used?
When interest rates are high
46
What must the issuer pay if a put is exercised?
Accrued interest plus par to the bondholder
47
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)
48
What are the 3 types of bond issue formats?
1. Term 2. Serial 3. Series
49
What are term bonds?
All bonds issued on the same day and mature on the same day
50
What are serial bonds?
All bonds issued on the same day, but mature on different days
51
What are series bonds?
Bonds issued on different days but all mature on the same day
52
What format are bonds issued by corporate and US government in?
Term format
53
What format are municipal bonds issued?
Serial format
54
What format of bonds are construction-related projects issued in?
Series format
55
What are balloon maturities?
A type of serial issuance where the largest portion matures at the final redemption
56
What is a bond quote?
Provides trading information
57
How are term bonds quoted?
In percentage of par
58
How are serial bonds quoted?
Yield form
59
What are three other words for bond Price Quote
1. Dollar 2. Term quote 3. Percentage of par quote
60
What are two other words for yield quote?
1. Serial quotes 2. Basis quotes
61
How much is 1 basis point?
.01 percent
62
What does a basis quote refer to?
Refers to a bond's yield
63
Who keeps unsold securities in best efforts underwriting?
The issuer
64
What are the two forms of return the bond buyer receivies?
1. Ongoing semi-annual interest 2. Receives the difference between the purchase price and the face value
65
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
66

Unit 2 (18 decks)

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