Bonds

Question 1

mutual fund

Answer 1

money pooled from investors and invested appropriately, good to diversify

real estate, cash, bonds, stocks of all cap sizes

Question 2

front end load

Answer 2

paid when you buy into MF, load goes to other party involved in the transaction

Question 3

back end load

Answer 3

selling shares requires a fee

Question 4

closed end fund

Answer 4

fixed number of shares

Question 5

open end fund

Answer 5

number of shares is adjustable

Question 6

index

Answer 6

construct portfolio to match a set benchmark

perform comparably to actives but cost less

Question 7

active

Answer 7

try to beat market / benchmark through buying and selling

Question 8

hedge fund

Answer 8

mutual fund for the rich that is less regulated, investors can take out assets if they underperform

Question 9

treasury strip bond

Answer 9

strip (CF at a certain time) sold up front

if sum of strips > original price - banker wins

Question 10

collateral

Answer 10

if issuer fails to pay the extra principle, bond owner can take other assets

e.g. mortgage / asset backed

Question 11

general obligation

Answer 11

if issuer defaults bondholder must take legal action

Question 12

convertible bond

Answer 12

bondholder can convert bond to shares of a company’s stock

convertibles have smaller coupon than non-convertibles, smaller payment on interest discourages over use of conversion

Question 13

callable bond

Answer 13

bond issuer can buyback bonds at lower interest rate

callable bonds have higher coupons making them more expensive to buy back to entice bondholder to sell

Question 14

Bond

Answer 14

IOU on debt

Principal + accrued interest

Never below FV

Question 15

Zero

Answer 15

Do not make any intermediate payment, you get principal and interest at the end

Good for known upcoming expenses

Question 16

Tax implication of 0s

Answer 16

issuer - tax deductible interest expense

buyer - annual taxable income

Question 17

BT 1 - yield vs price

Answer 17

bond prices and yields are inverses

Question 18

BT 2 - duration

Answer 18

if coupon rates and yield are different, price changes associated w a change in yield are more significant with longer duration / term to maturity

Question 19

BT 3 - price and duration

Answer 19

Price changes are more gradual with longer duration bonds

Question 20

BT 4 - capital gains

Answer 20

A decrease in yield causes a capital gain that is > than the capital loss caused by the same increase

Question 21

BT 5 - coupon rate

Answer 21

higher coupon rate means less sensitive to changes in interest rate