Ch. 4: Introduction to Debt Instruments

Question 1

What is the maturity type where a portion of principal is retired each year?

Answer 1

Serial bond

Question 2

The formula for finding conversion ratio is ____ divided by _____.

Answer 2

Par divided by conversion price

Question 3

For a bond, what does a call feature allow?

Answer 3

Allows the issuer of the bond to buy (call) back the bond before maturity

Question 4

What is forced conversion?

Answer 4

An issuer calls a bond at a point where stock is worth more than the bond’s call price

Question 5

A corporation that issues convertible bonds is borrowing money at a ____ rate.

Answer 5

Lower rate (convertibles pay lower interest rates)

Question 6

T/F: An issuer must call all of its bonds at the same time.

Answer 6

False, can have partial calls

Question 7

Define debt service.

Answer 7

Total of all interest payments and principal payments

Question 8

When interest rates go down, bond prices go ____

Answer 8

Up

Question 9

A bond trading at a price below par is a ____ bond

Answer 9

Discount

Question 10

The _____ represents amount above par that issuers pay to redeem bonds early

Answer 10

Call premium

Question 11

T/F: corporate and muni bonds are quoted in 32nds.

Answer 11

False; corporate / munis are quoted in 8ths

Treasuries are quoted in 32nds

Question 12

When an issuer performs a partial call, how does it choose which bonds to call

Answer 12

Utilizing an impartial lottery

Question 13

Zero coupons are purchased at a _____ and mature at _____.

Answer 13

Purchased at a discount and mature at par value

Question 14

List 3 bond yields.

Answer 14

Nominal, current, YTM

Question 15

What is the highest credit rating?

Answer 15

AAA for S&P and Fitch Aaa for Moody’s

Question 16

$____ is the par value for bonds

Answer 16

$1,000

Question 17

T/F: Investors buy zero coupon bonds for income.

Answer 17

False due to no semi-annual payments

Question 18

Jim owns a 5% bond maturing on 6/1. What would Jim receive at maturity if the bond pays interest semi-annually?

Answer 18

$1,025 (original amount + interest)

Question 19

Describe call protection.

Answer 19

Number of years after issuance during which bonds may not be called by the issuer

Question 20

Calculate the price of a T Bond that is quoted at 98 16/32

Answer 20

$985

Question 21

Is the conversion of a bond a taxable event?

Answer 21

Tax free; only becomes taxable when sold

Question 22

If a bond matures on 11/15, what two dates will the bond pay interest.

Answer 22

5/15 and 11/15 (every 6 months)

Question 23

T/F: An issuer will perform a lottery for a full-call

Answer 23

False, lottery is only for partial

Question 24

What is the advantage for a corporation that issues convertible bonds?

Answer 24

Pays a lower interest rate

Question 25

A type of maturity where all bonds mature on one specific date is called a ____ bond.

Answer 25

Term bond

Question 26

Bond interest rate is stated _____ and paid _____.

Answer 26

Stated annually and paid semi-annually

Question 27

A bond trading at a price above par is a ______ bond

Answer 27

Premium bond

Question 28

A _____ call is a situation where an issuer redeems an entire bond issue before maturity

Answer 28

Full call

Question 29

Bonds rate ____ and higher are considered investment grade

Answer 29

BBB (S&P / Fitch) Baa (Moody's)

Question 30

Who issues debt?

Answer 30

Corporations, municipalities, US government

Question 31

What is credit risk?

Answer 31

(default list) a risk that a company will be unable to pay interest or dividends on the spot

Question 32

Credit risk measures the issuer's risk of _____

Answer 32

Default on debt service

Question 33

_____ and _____ are two types of bond redemptions

Answer 33

Maturity and Calls

Question 34

_____ and _____ are two types of bond redemptions

Answer 34

Maturity and Calls

Question 35

______ are considered creditors of a company

Answer 35

Bondholders

Question 36

An investor who sells a bond between its coupon payments is entitled to _____ interest

Answer 36

accrued

Question 37

T/F: Short-term bonds have higher coupon payments?

Answer 37

False

Question 38

If a bond's first coupon payment is less than 6 months after its issuance, it is referred to as a _____ coupon

Answer 38

Short coupon

Question 39

Describe the dated date

Answer 39

Date on which a newly issued bond's interest begins to accrue

Question 40

T/F: bonds with call features have higher yields and bonds with put features have lower yields

Answer 40

True

Question 41

What types of debt instruments have the least amount of credit risk?

Answer 41

US Treasuries

Question 42

If a bond is "trading flat", what does that mean?

Answer 42

Trades without accrued interest

Question 43

Calculate the price of a bond trading at 98 3/4.

Answer 43

$987.5

Question 44

Bonds rated BB (Ba) or lower are considered ____ bonds

Answer 44

Junk

Question 45

If a AA rating is downgraded by 2 notches, what is the new rating.

Answer 45

A+

Question 46

What does a put feature allow?

Answer 46

Bondholders may put the bond back to the issuer

Question 47

If a bond matures on June 1, on what two dates will the bond pay interest

Answer 47

Dec 1 and June 1