Chapter 10 - Bond Prices & Yields Flashcards
Debt securities are also called?
fixed-income securities
A ______ security is a claim on a specified periodic stream of income.
debt
what is a security that is issued in connection with borrowing arrangement?
Bonds
_____ is a typical coupon bond obligating issuer to make semi-annual interest payments
coupon payments
______ same as ‘face value’ of bond?
par value
Most US bonds have a face value of _____?
$1,000
A = Coupon rate x Par/Face Value (FV)
Annual Payment (Coupon PMT)
3 parts of ‘bond indenture’
- Coupon rate
- maturity date
- par value
specified date at which principal amount (FV) of bond is paid (N)
Maturity
Treasury NOTES is from _____ to _____ years
1; 10
Treasury BONDS are from _____ to _______ years
10; 30
‘invoice price’ of buyer of bonds btw coupon payments = 2 variable?
stated price of bond + accrued interest (i.e. 30/182)
p. 294
_______ 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.
Callable Bonds
______ is a process where proceeds from new bond issue pays to repurchase previous high-interest debt at call price.
‘Refunding’
time period where bonds cannot be called, call protection.
‘Deferred’ callable bonds
_____ has the option to exchange bond for specific # of stocks/shares in a company.
Convertible Bonds
_____ ratio is number of shares for each bond
conversion
market conversion value is….
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))
______ is the excess of bond price over its conversion value.
conversion premium
if current price of bond is $950 and converted is $800 share value = $150 conversion premium
a bond option that puts right to extend to BONDHOLDER. only beneficial to exercise if coupon pmt exceeds current market yields.
put bond
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)
floating rate bonds
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?
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)
preferred stock in essences is a _____, providing cash flows indefinitely
perpetuity
True or False. Are preferred dividends subject to taxes? what about bonds?
True; false
preferred stock dividends received by a CORPORATION only have to pay _____% of received dividends
30%
$10,000 dividend; 30% = $3,000; Tax bracket 35% = (.35 x $3,000 = $1,050 taxes owed
state & local government bonds are called ?
municipal bonds
municipal bonds are or not tax-free?
are tax-free
International bonds are commonly divided into two categories:
- Foreign Bonds
2. Eurobonds
example of foreign bonds
german company in U.S. selling $-denominated bonds (yankee bonds)
example of Eurobond
England selling pound-denominated bonds to U.S. and other foreign markets
‘secured’ meaning
backed by asset
‘unsecured’ or debentured
no collateral
Nominal Return = (Interest + Price Appreciation) / Initial Price
- must calculate each year
Real Return = (1 + Nominal Return) / (1 + Inflation)
must calculate for each year
Bond Value = PV of Coupon PMTS + PV of Par Value
Simple definition
Annuity factor formula
(1/r) [1 - 1/((1+r)^t)]
PV factor formula
1 / [(1+r)^T]
remember: capital “T” is years multiplied by how many times a year for payments.
‘r’ is the semi-annual rate (R/2)
memorize!!
a bond’s _______ measures rate of return that accounts for current income & capital increase/decrease over bond’s life.
Yield to Maturity (YTM)
YTM is similar to IRR, yes or no?
yes
______ is defined as he discount rate that makes the PV of a bond’s payments equal to its price.
YTM
Yields annualized using simple interest are also called _____?
bond equivalent yield
a bond yield that accounts for COMPOUNDING interest (1+r)^2 is called _____ ?
‘Effective’ annual yield
________ yield is a bond’s coupon pmts / bond price
‘current yield’
what kind of bond is it when: coupon rate > current yield > YTM. & selling above par value
Premium Bonds
a bond where: coupon rate < current yield < YTM, and selling below par value.
discount bond
a call bond may be called by the issuer when % _____ and the coupon (scheduled) PMTS value _____ and is _____ than call PRICE.
fall; rises, greater
Yield to call is calculated similarly to YTM, however, 2 factors need careful attention and adjustment. what are they?
- Time of maturity is replaced with Time of CALL
2. Call PRICE replaces par value paid at end (DON’T FORGET THIS!!!!!!!!!!!!)
When calculating the ‘r’ in YTM and YTC, is the ‘r’ for semi-annual rate or annual rate calculated?
it’s is for semi-annual. to calculate the annual, must either:
- multiply ‘r’ x 2 to get [bond equivalent yield or simple interest]
- multiply (1+r)^2 to get [effective bond yield or compound %]
________________ is uncertainty surrounding the cumulative FV of reinvested bond coupon pmts
reinvestment rate risk
____ 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
original-issue discount bonds
