Bonds Flashcards
What market are publicly traded bonds usually traded in?
Over-the-counter (OTC) market
What do dealers in the bond market earn profit from?
The bid-ask spread
What happens to bond prices when demand exceeds supply?
Price rises
What is a corporate bond yield a function of?
Risk-free return plus credit spread
What is the relationship between bond yield and price?
Increase in yield leads to price decrease; decrease in yield leads to price increase
What is a bond indenture?
A document that sets forth the obligations of the issuer and the rights of the investors
Who typically serves as a corporate trustee?
Banks or trust companies
What is one of the roles of the corporate trustee?
Interpret the bond indenture and represent bondholders’ interests
What are covenants in a bond indenture?
Conditions that the issuer must comply with, which can be negative, positive, or financial
How are bonds classified by issuer?
Utilities, transportation companies, industrials, financial institutions, internationals
What are the maturity classifications for bonds?
Short-term (1-5 years), medium-term (5-12 years), long-term (greater than 12 years)
What is a fixed-rate bond?
A bond with a fixed interest rate set for the entire life of the issue
What is a floating-rate bond?
A bond where interest is linked to a market reference rate plus a fixed spread
What do zero-coupon bonds pay at maturity?
Face value or principal
What is one advantage of zero-coupon bonds?
Zero reinvestment risk
What are mortgage bonds backed by?
Supporting collateral that can be sold to pay off bondholders if there is a default
What are collateral trust bonds backed by?
Stocks, notes, bonds, or other obligations owned by the company
What are equipment trust certificates (ETCs)?
Bonds backed by a specific piece of equipment that is leased to the borrower
What are debentures?
Unsecured bonds with no collateral
What is a subordinated debenture bond?
A bond with a claim that is at the bottom of the list of creditors in case of default
What is a call provision in a bond?
A right for the issuer to purchase the bond at a fixed price before maturity
What is a sinking-fund provision?
A requirement for the issuer to retire a specified portion of the debt each year
What is a maintenance and replacement fund?
A fund to maintain the value of the underlying assets backing the bonds
What is a tender offer in the context of bond retirement?
A firm indicates interest in buying back bonds at a set price
