Ch. 4: Introduction to Debt Instruments Flashcards
What is the maturity type where a portion of principal is retired each year?
Serial bond
The formula for finding conversion ratio is ____ divided by _____.
Par divided by conversion price
For a bond, what does a call feature allow?
Allows the issuer of the bond to buy (call) back the bond before maturity
What is forced conversion?
An issuer calls a bond at a point where stock is worth more than the bond’s call price
A corporation that issues convertible bonds is borrowing money at a ____ rate.
Lower rate (convertibles pay lower interest rates)
T/F: An issuer must call all of its bonds at the same time.
False, can have partial calls
Define debt service.
Total of all interest payments and principal payments
When interest rates go down, bond prices go ____
Up
A bond trading at a price below par is a ____ bond
Discount
The _____ represents amount above par that issuers pay to redeem bonds early
Call premium
T/F: corporate and muni bonds are quoted in 32nds.
False; corporate / munis are quoted in 8ths
Treasuries are quoted in 32nds
When an issuer performs a partial call, how does it choose which bonds to call
Utilizing an impartial lottery
Zero coupons are purchased at a _____ and mature at _____.
Purchased at a discount and mature at par value
List 3 bond yields.
Nominal, current, YTM
What is the highest credit rating?
AAA for S&P and Fitch Aaa for Moody’s
$____ is the par value for bonds
$1,000
T/F: Investors buy zero coupon bonds for income.
False due to no semi-annual payments
Jim owns a 5% bond maturing on 6/1. What would Jim receive at maturity if the bond pays interest semi-annually?
$1,025 (original amount + interest)
Describe call protection.
Number of years after issuance during which bonds may not be called by the issuer
Calculate the price of a T Bond that is quoted at 98 16/32
$985
Is the conversion of a bond a taxable event?
Tax free; only becomes taxable when sold
If a bond matures on 11/15, what two dates will the bond pay interest.
5/15 and 11/15 (every 6 months)
T/F: An issuer will perform a lottery for a full-call
False, lottery is only for partial
What is the advantage for a corporation that issues convertible bonds?
Pays a lower interest rate
A type of maturity where all bonds mature on one specific date is called a ____ bond.
Term bond
Bond interest rate is stated _____ and paid _____.
Stated annually and paid semi-annually
A bond trading at a price above par is a ______ bond
Premium bond
A _____ call is a situation where an issuer redeems an entire bond issue before maturity
Full call
Bonds rate ____ and higher are considered investment grade
BBB (S&P / Fitch) Baa (Moody’s)
Who issues debt?
Corporations, municipalities, US government
What is credit risk?
(default list) a risk that a company will be unable to pay interest or dividends on the spot
Credit risk measures the issuer’s risk of _____
Default on debt service
_____ and _____ are two types of bond redemptions
Maturity and Calls
_____ and _____ are two types of bond redemptions
Maturity and Calls
______ are considered creditors of a company
Bondholders
An investor who sells a bond between its coupon payments is entitled to _____ interest
accrued
T/F: Short-term bonds have higher coupon payments?
False
If a bond’s first coupon payment is less than 6 months after its issuance, it is referred to as a _____ coupon
Short coupon
Describe the dated date
Date on which a newly issued bond’s interest begins to accrue
T/F: bonds with call features have higher yields and bonds with put features have lower yields
True
What types of debt instruments have the least amount of credit risk?
US Treasuries
If a bond is “trading flat”, what does that mean?
Trades without accrued interest
Calculate the price of a bond trading at 98 3/4.
$987.5
Bonds rated BB (Ba) or lower are considered ____ bonds
Junk
If a AA rating is downgraded by 2 notches, what is the new rating.
A+
What does a put feature allow?
Bondholders may put the bond back to the issuer
If a bond matures on June 1, on what two dates will the bond pay interest
Dec 1 and June 1
