Chap 6 Flashcards
The details of a bond issue are outlined in a …….
Trust deed
If the issuer of a bond issue can no longer meet the fixed obligations, the bond goes into……
default
a type of bond that is back by the general creditworthiness of the issuer
debenture
The sum of the present value of all future interest payments plus the present value of the future repayment of the loan upon maturity
Bond Price
Variable rate bonds are referred to ……
Floating rate securities
Bonds can be purchased only in specific……
denominations
Bonds that have more than 1 year but less than 5 years remaining in their term.
Short-term bonds
Bonds that have 5 to 10 years remaining in their term
Medium term bonds
Bonds that have greater than 10 years remaining in their term.
Long-term bonds
Bonds that have less than 1 year remaining in their term
Money Market Bonds
T-bills and commercial paper are __________ with terms of 1 year or less.
Money Market Securities
_______ trade significant volumes. Medium and large trades can be made quickly without significant sacrifice on the price.
Liquid Bonds
__________can be transferred because they are in good delivery form. Among other things, good delivery generally refers to a time when actual paper copies of bonds and fixed-income securities were delivered between investment dealers.
Negotiable Bonds
_____ have a ready market. They can be sold in secondary markets
Marketable Bonds
Strip bonds are also called ______
Zero-coupon Bonds
A _______ is created when a dealer acquires a block of high-quality bonds and separates the individual, future-dated interest coupons from the rest of the bond.
Strip Bond (zero coupon bonds)
The income on strip bond is considered ___________ rather than a capital gain.
Interest Income
Interest income tax must be paid ___________
Annually
Bond issuers often reserve the right, but not the obligation, to pay off the bond before maturity, either to take advantage of lower interest rates or simply to reduce their debt when they have the excess cash to do so. A bond bearing this clause is known as a _______ or ___________.
Callable bond or Redeemable bond
As a rule, the issuer agrees to give notice of ___ to ___ days that the bond is being called or redeemed.
10 to 30
The period before the first possible call date (during which a callable bond cannot be called) is known as the _____________
Call Protection Period
_____________ and debentures are usually issued with a short maturity term (typically 5 years), but with an option to extend the investment.
Extendable Bonds
_____________are the opposite of extendible bonds. They are issued with a long maturity term but with the option to redeem early.
Retractable Bonds
With both extendible and retractable bonds, the decision to exercise the maturity option must be made during a specific time called the _________.
Election Period
_________ combine certain advantages of a bond with the option of exchanging the bond for common shares
Convertible Bonds and debentures (Convertibles)
In effect, a convertible security allows an investor to lock in a specific price (called the conversion price) for the common shares of the company. The right to exchange a bond for common shares on specifically determined terms is called the _________
Conversion Privilege
The __________ of most convertible bonds goes up gradually over time to encourage early conversion.
Conversion Price
____________ is an innovation built into certain convertible debt issues to give the issuing company more control in calling in the debt for redemption
Forced Conversion
The issuing company will typically be interested in forcing a conversion when …..
The market interest rates fall below the bond’s coupon rate, or if the price of the underlying common shares begins to trade above the conversion price.
This is where funds are set aside each year to retire the bond (binding obligation).
Specific serial numbers are called and retired each year.
Sinking Funds
Funds are set aside each year to repurchase the bonds if the market price drops below some predetermined price. (only binding if the price of the bond falls below some level)
Purchase Funds
These types of bonds have a secondary market (transferable) and are noncallable.
Government Marketable Bonds
- Maturity of less than 1 year
- Issued at a discount, mature at par (zero coupon)
- Money market securities
T-bills
_______are short-term gov’t obligations offered in denominations from $1000 up to $1 million. These securities appeal to a broad range of investors, including large institutional investors such as banks, insurance companies, and trust and loan companies, as well as to retail investors.
T-Bills
Like conventional bonds, __________ pay interest throughout the life of the bond and repay the original principal amount upon maturity. Unlike conventional bonds, however, the coupon payments and principal repayment are adjusted for inflation to provide a fixed real coupon rate.
Real Return Bonds
At each interest payment date, the real coupon rate is applied to a principal balance that has been adjusted for the cumulative level of inflation since the date the bond was issued. The cumulative level of inflation is known as the bond’s _______
Inflation Compensation
- Marketable
- Second in credit quality only to Fed bonds
- Issue in Canada and internationally (both CAD and other currencies)
Provincial Bonds
The instrument that most municipalities use to raise capital from market sources is the ________
Installment Debenture (serial bond)
You would classify a bond issued by a Crown corporation of Alberta as a _______
Guaranteed Bond
A corporate bond that is secured by land, buildings, or equipment pledged as security.
Mortgage Bond
A corporate bond. Senior debt (senior securities of a company) Nothing is higher. Has first claim on all assets. -May have an ‘after acquired’ clause which includes all assets, even those acquired after the bond issue
First Mortgage Bond
A corporate bond that is secured by a pledge of securities
Collateral Trust Bond
A corporate bond that is secured by specific equipment (trains, ships, airplanes, etc…)
Equipment Trust Certificates
Corporate junior debt, unsecured.
Subordinate Debentures
A corporate bond that adjust coupon payments to market interest rates
Floating-rates Securities
Short-term, unsecured promise made by a corporation to pay interest and repay the funds borrowed at a specific date, or specific dates.
Corporate Notes
Very long-term, subordinated debentures. Exchange traded; interest may be deferrable for up to 5 years. Lowest ranking debt instrument
Preferred Securities
non-investment grade (not necessarily a high coupon) They are sold at deep discounts. Sometimes referred to as Junk Bonds.
High Yield Bonds
Issued in the country and currency of issuer. EX: Canadian company issuing Canadian bonds
Domestic Bonds
Issued outside issuers country in the currency of the ‘issued- in’ country. EX: Canadian company issues bonds in the U.S. in USD.
Foreign Bonds
interest in one currency, principal in another. Investors can choose the currency for coupon payments.
Foreign Pay Bonds
Issued internationally, not in any one market. Meant to avoid the issuing requirements of any one jurisdiction (typically bearer bonds). Can be issued in any currency.
Eurobonds
A commercial draft, guaranteed on maturity by the borrower’s bank
Bankers Acceptances
Unsecured promissory note issued by a corporation or an asset-backed security backed by a pool of underlying financial assets. Sold at a discount, and matures at par.
Commercial Paper
Guaranteed rate for a short-term deposit (usually up to 1 year).
Term Deposits
Offer fixed rates of interest for a specific term. Both principal and interest payments are guaranteed. They can be redeemable or non-redeemable.
Guaranteed Investment Certificates (GICs)
interest rate increases over GIC life
Escalating rate GIC
5yr GIC- 1yr, 2yr,3yr,4yr,5yr (1/5th each year)
Laddered GICs
GICs with Contributions over time
Installment GICs
Guaranteed principal + some equity market return GICs
Index-linked GICs
