Ch 12 Debt And CEs

Question 1

NY vs CY vs YTM vs YTC

Answer 1

Progressively more accurate ways to measure bond yields. Also they get progressively more sensitive to interest rate changes
Premium: NY > CY > YTM
Discount: YTM > CY > NY

Nominal yield aka coupon; fixed % of par

CY = annual interest / current market price
Designed to adjust yield based on whether you bought at a discount or premium to par

YTM aka basis aka yield
Includes reinvestment of interest and gain and loss of the bond

Like YTM but only measured for period until callable bonds call date

Question 2

Relationship between Bond price and yield and interest rates

Answer 2

Interest rates and bond price are inversely related

Interest rates and bond yields are directly related

Question 3

Credit ratings and agencies

Answer 3

S&P/fitch:
AAA to B etc
Investment grade: AAA, AA, A, BBB
Speculative grade: BB, B etc.
Each grade can be + or -

Moodys
Aaa to B
Investment grade: Aaa, Aa, A, Baa
Speculative grade: Ba, B etc.
Each grade can be 1, 2, or 3

Question 4

Convertible bonds

Answer 4

Corporate bonds that can convert to predetermined number of common shares

Question 5

Conversion ratio

Answer 5

Par value / conversion price

Question 6

TIPS

Answer 6

Coupon rate stays the same but principal adjusts with inflation

The investor received the adjusted principal at maturity. It’s rare to receive par with TIPS

Question 7

Muni bond taxation

Answer 7

Interest received is NOT taxable at the federal level and is NOT taxable at the state and city level IF you live there

In territories (eg Puerto Rico) there are never any taxes

Question 8

Examples of money market instruments

Answer 8

T bills (most common)

Bankers acceptance (facilitate foreign trade)

Commercial paper (unsecured corporate bonds <9 mos maturity)

Negotiable CDs (unsecured bank debt; $100K minimum; not always FDIC insured)

Repurchase agreements (BD sells security to another BD with promise to buy it back, like a loan)

Question 9

Credit spread

Answer 9

Difference in yields between various bonds with similar maturities

Question 10

Refunding

Answer 10

Kind of like refinancing for a bond issuer

They sell new bonds and use the proceeds to pay off outstanding bonds

Question 11

Barbell strategy

Answer 11

Buying bonds at the two ends of the yield curve (long and short maturities)

Captures high coupon payment on long term bonds but retains the ability to reinvest quickly when short term bonds mature

Question 12

Which has lower yields, treasury or muni bonds?

Answer 12

Muni because they’re federally tax free

Question 13

What does the yield curve look like in periods of easy money when interest rates are declining?

Answer 13

Yields of shorter maturity will be less than yields of longer maturities

Question 14

What is an example of a demand deposit?

Answer 14

Represents money that can be freely withdrawn

Eg, Checking account

Question 15

acid test ratio

Answer 15

Aka quick asset ratio
Measures short term liquidity (usually 1-3 months) l

Current assets - inventory
/
Current liabilities