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Series 7 V2 > Bonds - General > Flashcards

Bonds - General Flashcards

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Series 7 Top-off Exam flashcards
1
Q

What is a putable bond? What type of bond is it most commonly used in? What risk does it eliminate for the issuer?

A

This is a bond with put options. For slightly lower int rate investor has right to sell back (Put) to issuer at par value. Once per year.

Municipal bonds

Investor protected against market risk (int rate risk) as bonds will not trade below par price.

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2
Q

When calculating accrued interest what # of days/mth or yr are used for various securities

A

Corporate, Municipal, Agency: 30 days month

Government: 360 day year

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3
Q

What is defeasance?

A

Associated with pre-refunded/advanced refunding bonds.
Termination of bondholders original obligation; pre-refunded bonds are considered defeased and no longer count as a liability

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4
Q

What is chart to for relationship between bond price yield.

A

Premium Current Yield
Par Yield to Maturity
Discount Yield to Call

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5
Q

What does 1 point equal

A

1% of $1,000 = $10 = 100 basis points

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6
Q

How often is interest paid on bonds typically

A

Semi-annually

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7
Q

what is par value

A

face value of bond

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8
Q

Who rates bonds and which bonds do they rate

A

Standard & Poors, Moody’s - corporate & municipal

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9
Q

What does 5m JCD JJ 15 8’s of ‘21

A 
$5000
Issuer is JCD
Int paid Jan & Jun 15 (cld also be M&S - May & Sep)
8%
Mature in 2021
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10
Q

How can bonds be quoted

A

Yield or % of par dollar amount

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11
Q

Bonds are often issued with a call feature. What is a call feature? What is an alternate name for a call feature:

A

Call option.
Allows issuer to redeem a bond issue before maturity. Issuer can notify bondholders thatit will call for a certainprice and date or partial call - bonds are sellted by a lottery (randomly)

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12
Q

Corporate Bonds: What does bid of 100 mean?

A

100% of par; or 1000

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13
Q

Corporate Bonds: What does bid of 98 1/8 mean?

A

98.25% of par; or $981.25

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14
Q

What if yield curve is widening between gov’t and corporate bonds? What if narrowing?

A

Expanding: recession as investors move to security of gov’t bonds; investors do not want to take risk

Narrowing: expansionary as investors move to corporate bonds; will take more risk

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15
Q

What is 1 basis point as a % of a point

A

1/100%

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16
Q

What are most common risks & define

A

(R) Reinvestment - zero bonds, 0 reinvest risk because don’t pay interest
(I) int rate - risk that rates rise
(P) prepayment - underlying mortgage paid off earlier than anticipated
(E) extended maturity - underlying mortgage remains O/s longer

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17
Q

What is crossover refunding

A

Method of advance/pre-refunding where stream of revenue from refunded bond is used to pay off debt service of original bond till matured or called.

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18
Q

Characteristics of a sinking fund

A
  1. Operated by bonds trustee
  2. Can add to marketability by lower rated issuers
  3. Issuers deposits funds with trustee
  4. Used to call bonds, redeem bonds at maturity or buy back bonds inthe open market
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19
Q

What is a corporate bonds > 5 years called

A

Funded debt

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20
Q

What is current yield of a 6% bond trading at $800

A

current yield = coupon / market rate

= 60/850 = 7.5%. Bond trading at discount

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21
Q

What is a call premium

A

If issuer of bond calls then for the right of flexibility the bonds are bought at a price above par. The call preimum is the difference between the par price and call price

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22
Q

Answer:

  1. If bond has a YTC lower than CY, it is trading at…
  2. If bond has a YTM and CY that are equal, it is trading at…
  3. If a bond has a YTM less than YTC, the bond is trading at…
  4. If a bond has a YTM greater than its’ coupon, the bond is trading at
A
  1. premium
  2. par
    3 discount
    4 discount
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23
Q

Names for bonds sold at premium or discount

A

above part/below par

24
Q

Explain difference between registered and book-entry bonds

A

Registered - used by corporation; certificate received
Fully registered & principal only (no longer used)

Book-Entry Bonds - used by gov’t; no certificate

25
Q

Yield to maturity calc? What is another term for ‘Yield to Maturity’?

A

YTM - (annual int - (premium / Yrs to maturity))/ Aver price of bond.

Yield to maturity also called ‘Par’ e.. a 4% bond trading on a 5% basis is trading at aprice to yield 5% to maturity.

26
Q

How many bond rating firms are recognized by the SEC; who recognizes rating firms

A

7; SEC

27
Q

Common maturity dates on bonds

A

5 to 30 years

28
Q

What is ‘debt service’

A

The schedule of int and prinicipal payments

29
Q

What are two major grades of bonds? What are their differences?

A

Investment Grade (BBB & Baa and above) or Speculative Grade ( below INvestment Grade)

30
Q

What is coupon

A

Interest rate on bond

31
Q

When does pre-refunding occur

A

During call protection period. Used if int rates low, then a pre-refunding bond purchased.

32
Q

Bond prices are based on

A

Interest rate

33
Q

Define ‘liquidity’ and an alternate name?

A

How quickly a security can turn into cash.

‘Marketability’

34
Q

How often is interest calc on bond

A

daily

35
Q

If a bond is Whatcallable at 102 what is the call premium?

A

2 points is $20 per bond

36
Q

Maturity types of bonds (there are 4)

A
  1. Term - principal pays @ end, sinking fund must be established
  2. Serial - portions of principal paid over time
  3. Balloon - portions of principal paid over time but majority on maturity
  4. Sequence - borrowing spread over many years
37
Q

What happens when a bond is redeemed

A

A bonds principal is paid in full

38
Q

What is pre-refunded bond/advance refunding? Characteristics

A

Also called Advance refunding. A new issue called before old one comes due. Used when int rates are dropping.

Characteristics:

  1. Must be AAA or Aaa funds
  2. Funds escrowed in gov’t securities
  3. Considered defeased
  4. Marketability of pre-refunded bond increases
  5. Once pre-refunded, issue no longer considered part of debt of issuer
39
Q

What are the typical values of a bond

A

$1000 or multiples of $5000 up to $100,000

40
Q

What are ratings of bonds based on

A

credit worthiness

41
Q

What bonds are not rated? Does it mean their quality is not good?

A

Too small for it to be worth it; no - could be high quality

42
Q

Where are bonds sold once issued

A

2ndary market

43
Q

What is relationship of bond prices to yields

A

Move in opposite directions e.g. when int rates fall bond prices increase

44
Q

Levels of risk of Corporate Bonds

A 
Can very safe to very risk (junk bonds);
Rough guideline
1.  Secured bonds
2.  Debentures
3.  Subordinated Debentures
4.  Income bonds
45
Q

What is the typical non-callable time period for a bond? What is the feature called?

A

5-10 years; call protection feature; it protects bondholders when interest rates are falling

46
Q

What is nominal yield? What is another name for it?

A

Coupon yield.

Set at issuance, int rate printed on face of bond e.g coupon of 6% pays $60/year in int

47
Q

What are investment grade bonds also known as?

A

Bank grade bonds as banks can only buy bonds (as determined by FDIC, Compt of Currency, and Fed Reserve

48
Q

What is current yield calc?

A

Current yield:

Coupon payment / market price

49
Q

List, in order of safety, types of debt securities

A
  1. US Govt Securities
  2. Govt Agency Issues:
    Fannie Mae (FNMA) - Fed National Mortgage Assoc
    Ginnie Mae (GNMA) - Govt National Mortgage Assoc
    Freddie Mac (FHLMC) - Fed Home Loan Mort Corp
    Fed Farm Credit (FFCB) - Fed Farm Credit Banks
    3 Municipal Issues
    4 Corporate Debt
50
Q

What is a tender offer? When used?

A

When int rates low, co’s may wish to redeem callable and on-callable bonds. Usually at premium price to entice bondholders to sell bonds back.

51
Q

What is ‘call risk’? What is ‘investment risk’

A

Call Risk: Issuer calls the bond

Investment Risk: Investor faced with having to replace high fixed income investment with on that pays less

52
Q

An auction is used to sell which types of debt securities

A

Treasury Bills & Notes

53
Q

What type of security is a bond

A

Senior security

54
Q

What is the difference to the investor between the call notice and the call date on a bond

A

Investor can sell the bond on the market or wait till the call date to get paid by the issuer

55
Q

How are corporate bond prices quoted

A

% of part; incremments of 1/8.

Series 7 V2 (7 decks)

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