Bonds Flashcards
How often is bond interest paid?
Usually semiannually
What are zero coupon bonds
No interest paid. They are purchased at a discount
What are serial bonds
Part of the same issue i.e. Issued at same time but some have different interest rates and maturity dates. The longer the time to maturity the higher the interest rate. If the largest amount of them have the highest maturity date that is called a balloon maturity
What are series bonds
An issue of bonds with same maturity date but with different issue dates. They are rare and are used to finance projects where all the money is not needed at the same time
Remember series (s for scarce)
What is Par
Face value = Principal = $1000
What is a term bond
Bond issues with single maturity date and single interest rate
What kind of bonds are term bonds
Corporate and US gov bonds and some munis
What kind of bonds are serial bonds
Some Munis and corp equipment trust certs
US Gov Bond Duration
Treasury Bills <= 12months
Treasury Notes 2-10 years
Treasury Bonds > 10 years
Think BNB for the seq
Tax payable on bonds
US gov bonds - interest is tax free at state and local levels but not federal level
Munis - if you buy them from the state where you live there is no local or state tax. Interest on munis is tax free at federal level
Corps - interest is payable at state and local level and at federal level
Bond Risks
Interest rate risk (or market risk) - if general interest rates rise bond prices fall
Reinvestment risk - when cash them in you might not get something with similar or better interest rate
Purchasing power risk - money is locked away and may be impacted by inflation at the end
Default risk - e.g. for corps bonds, company could go bust
Call risk - for callable bonds if interest rates fall the bond may be recalled and you might only be able to get a lower interest bond at that stage
Why issue serial bonds?
- By offering different term options it widens the potential pool of investors
- The issuer avoids having to have large amount of cash available to pay off all investors at same time if they all mature together
