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SIE > Ch. 4: Introduction to Debt Instruments > Flashcards

Ch. 4: Introduction to Debt Instruments Flashcards

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SIE Exam flashcards
1
Q

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

A

Serial bond

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2
Q

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

A

Par divided by conversion price

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3
Q

For a bond, what does a call feature allow?

A

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

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4
Q

What is forced conversion?

A

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

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5
Q

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

A

Lower rate (convertibles pay lower interest rates)

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6
Q

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

A

False, can have partial calls

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7
Q

Define debt service.

A

Total of all interest payments and principal payments

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8
Q

When interest rates go down, bond prices go ____

A

Up

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9
Q

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

A

Discount

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10
Q

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

A

Call premium

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11
Q

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

A

False; corporate / munis are quoted in 8ths

Treasuries are quoted in 32nds

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12
Q

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

A

Utilizing an impartial lottery

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13
Q

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

A

Purchased at a discount and mature at par value

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14
Q

List 3 bond yields.

A

Nominal, current, YTM

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15
Q

What is the highest credit rating?

A

AAA for S&P and Fitch Aaa for Moody’s

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16
Q

$____ is the par value for bonds

A

$1,000

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17
Q

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

A

False due to no semi-annual payments

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18
Q

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

A

$1,025 (original amount + interest)

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19
Q

Describe call protection.

A

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

20
Q

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

A

$985

21
Q

Is the conversion of a bond a taxable event?

A

Tax free; only becomes taxable when sold

22
Q

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

A

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

23
Q

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

A

False, lottery is only for partial

24
Q

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

A

Pays a lower interest rate

25
Q

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

A

Term bond

26
Q

Bond interest rate is stated _____ and paid _____.

A

Stated annually and paid semi-annually

27
Q

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

A

Premium bond

28
Q

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

A

Full call

29
Q

Bonds rate ____ and higher are considered investment grade

A

BBB (S&P / Fitch) Baa (Moody’s)

30
Q

Who issues debt?

A

Corporations, municipalities, US government

31
Q

What is credit risk?

A

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

32
Q

Credit risk measures the issuer’s risk of _____

A

Default on debt service

33
Q

_____ and _____ are two types of bond redemptions

A

Maturity and Calls

34
Q

_____ and _____ are two types of bond redemptions

A

Maturity and Calls

35
Q

______ are considered creditors of a company

A

Bondholders

36
Q

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

A

accrued

37
Q

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

A

False

38
Q

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

A

Short coupon

39
Q

Describe the dated date

A

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

40
Q

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

A

True

41
Q

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

A

US Treasuries

42
Q

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

A

Trades without accrued interest

43
Q

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

A

$987.5

44
Q

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

A

Junk

45
Q

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

A

A+

46
Q

What does a put feature allow?

A

Bondholders may put the bond back to the issuer

47
Q

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

A

Dec 1 and June 1

SIE (20 decks)

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