Bonds

Question 1

What is a Bond?

Answer 1

A bond is a borrowing arrangement through which the borrower (or seller of a bond) issues or sells an IOU document to the investor (or buyer of the bond).
An investor lends money to a company or government
Debt Securities with Fixed Income.

Question 2

Why Issue Debt?

Answer 2

Firm wants to raise capital
Does not want to dilute ownership
Can earn more money on the use of the funds in the business than the cost of interest on the debt.

Question 3

What are Bond Features?

Answer 3

Repayment Date
Interest Rate & Frequency
Nominal Value
Tradable

Question 4

What is Repayment Date?

Answer 4

When the money will be returned? Also known as the redemption or maturity date. This is when the bond will redeemed.

Question 5

What is Interest Rate & Frequency?

Answer 5

Percentage paid as interest and how often it is paid. More typically termed as the COUPON on a bond.

Question 6

What is Nominal Value?

Answer 6

Also known as the face value it is the amount that is written on the face of the bond certificate

Question 7

What is tradeable?

Answer 7

When bonds can be sold before they reach their repayment date?

Question 8

What is Maturity, Redemption or Repayment date?

Answer 8

The length of time until the principal amount of a bond must be repaid.
Maturity Date: The end of the life of a security. The day on which the principal or amount must be repaid.

Question 9

What is Face/ Per value?

Answer 9

What the Bond reads and what the investor receives if they hold the bond to its maturity.
Face Value of most bonds is $1000.

Question 10

What is Coupon Rate?

Answer 10

This is the INTEREST RATE paid on the FACE/NOMINAL value of the bond
Usually as a percentage and the frequency of the payment.

Question 11

What is Yield?

Answer 11

This is just another word for “return” and it is expressed as an ANNUAL PERCENTAGE
Usually as a percentage and the frequency of the payment.

Question 12

What is Coupon vs Yield?

Answer 12

YIELD and COUPON are not the same thing.
They are only the same when the bond is bought/sold at its FACE/NOMINAL value.
Otherwise, generally they are different.

Question 13

What is Flat Yield?

Answer 13

When the calculation of YIELD = COUPON/PRICE

Question 14

What is Yield to maturity?

Answer 14

When the calculation includes the capital gain/or loss if the bond is held until its maturity date

Question 15

Why invest in a bond?

Answer 15

To distribute risk across a diversity of investments holdings.
Investors want a steady reliable interest payment and return of their full capital or investment at the end of the term of the bond

Question 16

What is Bond Risk?

Answer 16

An evaluation of the possibility of default by a bond issuer. It is based on an analysis of the issuer’s financial condition and profit potential. Bond rating services are provided by, among others, Standard & Poor’s, Moody’s Investors Service, and Fitch Investors Service.

Bond ratings start at AAA (being the highest investment quality) and usually end at D (in payment default).

Question 17

What are Types of Bonds?

Answer 17

Municipal
Treasuries
Zero-Coupon
Junk / Speculative-grade
International

Question 18

What are bonds sold at?

Answer 18

Bonds can be sold at par, discount, or premium
When the price is $1000 OR on the face value → Par
When the price is less than $1000 OR below the face value → Discount
When the price is above $1000 PR above the face value → Premium