Chapter 10 - Bond Prices & Yields

Question 0

Debt securities are also called?

Answer 0

fixed-income securities

Question 1

A ______ security is a claim on a specified periodic stream of income.

Answer 1

debt

Question 2

what is a security that is issued in connection with borrowing arrangement?

Answer 2

Bonds

Question 3

_____ is a typical coupon bond obligating issuer to make semi-annual interest payments

Answer 3

coupon payments

Question 4

______ same as ‘face value’ of bond?

Answer 4

par value

Question 5

Most US bonds have a face value of _____?

Answer 5

$1,000

Question 6

A = Coupon rate x Par/Face Value (FV)

Answer 6

Annual Payment (Coupon PMT)

Question 7

3 parts of ‘bond indenture’

Answer 7

1. Coupon rate
2. maturity date
3. par value

Question 8

specified date at which principal amount (FV) of bond is paid (N)

Answer 8

Maturity

Question 9

Treasury NOTES is from _____ to _____ years

Answer 9

1; 10

Question 10

Treasury BONDS are from _____ to _______ years

Answer 10

10; 30

Question 11

‘invoice price’ of buyer of bonds btw coupon payments = 2 variable?

Answer 11

stated price of bond + accrued interest (i.e. 30/182)

p. 294

Question 12

_______ are bonds repurchased by issuer (corporate) at a specified call price during call period. most attractive when interest rates are falling and corporate wants to refinance their prior interest-paying debts.

Answer 12

Callable Bonds

Question 13

______ is a process where proceeds from new bond issue pays to repurchase previous high-interest debt at call price.

Answer 13

‘Refunding’

Question 14

time period where bonds cannot be called, call protection.

Answer 14

‘Deferred’ callable bonds

Question 15

_____ has the option to exchange bond for specific # of stocks/shares in a company.

Answer 15

Convertible Bonds

Question 16

_____ ratio is number of shares for each bond

Answer 16

conversion

Question 17

market conversion value is….

Answer 17

current value of the shares for which a bond may be traded

(i.e. if current market is $20/share, and 1 $1000 bond = 40 shares; then market conversion value = $800 ($20 x 40 shares))

Question 18

______ is the excess of bond price over its conversion value.

Answer 18

conversion premium

if current price of bond is $950 and converted is $800 share value = $150 conversion premium

Question 19

a bond option that puts right to extend to BONDHOLDER. only beneficial to exercise if coupon pmt exceeds current market yields.

Answer 19

put bond

Question 20

bonds that make % pmts tied to some measure of current market rates (i.e. annually, etc). has major risks where it doesn’t adjust to financial condition changes of the firm/issuer (but it does for general level of market interest rates)

Answer 20

floating rate bonds

Question 21

if fixed coupon payments are not met on bonds due to financial hardships, is this a red flag towards bankrupcty?

What about on preferred stocks?

Answer 21

Yes. No, preferred dividends just cumulate when not paid, meaning it has to be paid all of it at a future date (when financial condition turns for the better)

Question 22

preferred stock in essences is a _____, providing cash flows indefinitely

Answer 22

perpetuity

Question 23

True or False. Are preferred dividends subject to taxes? what about bonds?

Answer 23

True; false

Question 24

preferred stock dividends received by a CORPORATION only have to pay _____% of received dividends

Answer 24

30%

$10,000 dividend; 30% = $3,000; Tax bracket 35% = (.35 x $3,000 = $1,050 taxes owed

Question 25

state & local government bonds are called ?

Answer 25

municipal bonds

Question 26

municipal bonds are or not tax-free?

Answer 26

are tax-free

Question 27

International bonds are commonly divided into two categories:

Answer 27

1. Foreign Bonds

2. Eurobonds

Question 28

example of foreign bonds

Answer 28

german company in U.S. selling $-denominated bonds (yankee bonds)

Question 29

example of Eurobond

Answer 29

England selling pound-denominated bonds to U.S. and other foreign markets

Question 30

‘secured’ meaning

Answer 30

backed by asset

Question 31

‘unsecured’ or debentured

Answer 31

no collateral

Question 32

Nominal Return = (Interest + Price Appreciation) / Initial Price

Answer 32

• must calculate each year

Question 33

Real Return = (1 + Nominal Return) / (1 + Inflation)

Answer 33

must calculate for each year

Question 34

Bond Value = PV of Coupon PMTS + PV of Par Value

Answer 34

Simple definition

Question 35

Annuity factor formula

Answer 35

(1/r) [1 - 1/((1+r)^t)]

Question 36

PV factor formula

Answer 36

1 / [(1+r)^T]

Question 37

remember: capital “T” is years multiplied by how many times a year for payments.

‘r’ is the semi-annual rate (R/2)

Answer 37

memorize!!

Question 38

a bond’s _______ measures rate of return that accounts for current income & capital increase/decrease over bond’s life.

Answer 38

Yield to Maturity (YTM)

Question 39

YTM is similar to IRR, yes or no?

Answer 39

yes

Question 40

______ is defined as he discount rate that makes the PV of a bond’s payments equal to its price.

Answer 40

YTM

Question 41

Yields annualized using simple interest are also called _____?

Answer 41

bond equivalent yield

Question 42

a bond yield that accounts for COMPOUNDING interest (1+r)^2 is called _____ ?

Answer 42

‘Effective’ annual yield

Question 43

________ yield is a bond’s coupon pmts / bond price

Answer 43

‘current yield’

Question 44

what kind of bond is it when: coupon rate > current yield > YTM. & selling above par value

Answer 44

Premium Bonds

Question 45

a bond where: coupon rate < current yield < YTM, and selling below par value.

Answer 45

discount bond

Question 46

a call bond may be called by the issuer when % _____ and the coupon (scheduled) PMTS value _____ and is _____ than call PRICE.

Answer 46

fall; rises, greater

Question 47

Yield to call is calculated similarly to YTM, however, 2 factors need careful attention and adjustment. what are they?

Answer 47

1. Time of maturity is replaced with Time of CALL

2. Call PRICE replaces par value paid at end (DON’T FORGET THIS!!!!!!!!!!!!)

Question 48

When calculating the ‘r’ in YTM and YTC, is the ‘r’ for semi-annual rate or annual rate calculated?

Answer 48

it’s is for semi-annual. to calculate the annual, must either:

1. multiply ‘r’ x 2 to get [bond equivalent yield or simple interest]
2. multiply (1+r)^2 to get [effective bond yield or compound %]

Question 49

________________ is uncertainty surrounding the cumulative FV of reinvested bond coupon pmts

Answer 49

reinvestment rate risk

Question 50

____ are bonds that are issued intentionally with low coupon rates that cause bonds to sell at a discount. less common than coupon bonds issued at par. example: zero-coupon bond

Answer 50

original-issue discount bonds