Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FIN2303 > Chapter 13: Investing in Bonds > Flashcards

Chapter 13: Investing in Bonds Flashcards

1
Q

Bonds:

A

long-term debt securities issued by government agencies or corporations that are collateralized by assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Par value:

A

for a bond, its face value, or the amount returned to the investor at the maturity date when the bond is due

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Debentures:

A

long-term debt securities issued by corporations that are secured only by the corporation’s promise to pay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Term to maturity:

A

the date at which a bond will expire and the par value of the bond, along with any remaining coupon payments, is to be paid back to the bondholder

Bonds maturities may vary between 1 and 30 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

background on bonds

A

Investors provide the issuers of bonds with funds
Issuers are obligated to make interest payments and to pay the par value at maturity
Coupon payments are normally paid semi-annually
Some bonds are issued at a price below par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Call Feature

A

a feature on a bond that allows the issuer to repurchase the bond from the investor before maturity
-Offer a slightly higher return than similar bonds without a call feature

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Sinking fund

A

a pool, of money that is set aside by a corporation or government to repurchase a set amount of bonds in a set period of time
-Acts like a mandatory call feature

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Convertible bond:

A

: a bond that can be converted into a stated number of shares of the issuer’s stock at a specified price
-Tend to offer a lower return than non-convertible bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Extendible bond:

A

a short-term bond that allows the investor to extend the maturity date of the bond
-Tend to offer a lower return than non-extendible bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Put feature:

A

a feature on a bond that allows the investor to redeem the bond at its face value before it matures
-Slightly lower return than similar bonds without a put feature

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Bond Characteristics

A
  • call feature
  • sinking fund
  • convertible feature
  • extendible feature
  • put feature
  • yield to maturity
  • discount
  • premium
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Yield to maturity

A

the annualized return on a bond if it is held until maturity

-If a bond sells at par value, its yield to maturity equals the coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Discount:

A

a bond that is trading at a price below its par value

-If a bond sells below par value, its yield to maturity would exceed the coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Premium:

A

: a bond that is trading at a price above its par value

-If a bond sells above par value, its yield to maturity would be less than the coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Bonds Trading in the Secondary Market

A
  • Investors can sell their bonds to other investors before the bonds reach maturity
  • Bond prices change in response to interest rate movements and other factors
  • Investors buy or sell bonds from a brokerage firm’ bond inventory
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Term structure of interest rates:

A

: a graph that shows the relationship between bond yield to maturity and time to maturity

- Resulting curve is known as a yield curve
- Shape of the yield curve reflects the market’s sentiment about the direction for interest rates over time
- Yield curve shapes include normal, steep, inverted, and flat
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Theories that attempt to explain why the term structure of interest rates is shaped the way that it is:

A

Liquidity preference theory

pure expectations theory

market segmentation theory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Liquidity preference theory

A

suggests that investors require a premium for investing in longer-term bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

pure expectations theory

A

suggests that the shape of the yield curve is a reflection of the market’s expectation for future interest rate movements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

market segmentation theory

A

suggests that the shape of the yield curve is determined by the supply and demand of bonds for various market players in different segments of the yield curve

21
Q

Types of Bonds

A 
Government of Canada Bonds
Federal Crown Corporation Bonds
Provincial Bonds
Municipal Bonds
corporate bonds
22
Q

Government of Canada Bonds

A

debt securities issued by the Canadian government
-Not exposed to the risk of default by the issuer
-Issued with a term to maturity of between 1 and 30 years
-Interest is paid semi-annually
-
-Can be sold easily in the secondary market
-marketable bonds –> Government of Canada bonds that can be sold in a secondary market

23
Q

Federal Crown Corporation Bonds

A
  • -debt securities issued by corporations established by the federal government
  • -Not exposed to the risk of default by the issuer
  • -Issued with a term to maturity of between 2 and 10 years
  • -Interest is paid semi-annually
  • -Can be sold easily in the secondary market
24
Q

Provincial Bonds

A

-debt securities issued by the various provincial governments

  • Risk of default by the issuer will differ depending on the province from which you purchased the bond
  • Issued with a term to maturity of between 1 and 30 years
  • Interest is paid semi-annually
  • Can be sold easily in the secondary market
25
Q

Municipal Bonds

A

—long-term debt securities issued by local government agencies

  • Provide the funds necessary for municipal projects
  • Very low default risk
  • Uncommon investments in Canada
  • Terms and condition will vary with the needs of the municipality
26
Q

Corporate Bonds

A

long-term debt securities issued by large firms

  • Subject to default risk
  • High-yield bonds
  • terms and condition will vary with the needs of the corporation
27
Q

High-yield bonds:

A

bonds issue by less stable corporations that are subject to a higher degree of default risk

28
Q

Other Fixed-Income Products

A

Short-Term -Debt Securities

-T-Bill’s
-Banker’s aceptances (BAs)-
- Commercial Paper
-

29
Q

T-Bills:

A

short-term debt securities issued by the Canadian and provincial governments and sold at a discount

-Do not make coupon payments

30
Q

Banker’s acceptances (BAs):

A

short-term debt securities issued by large firms that are guaranteed by a bank

31
Q

Commercial paper:

A

a short-term debt security issued by large firms that is guaranteed by the issuing firm

32
Q

Canada Savings Bonds (CSBs):

A

ten-year debt securities issued by the Canadian government

Fully guaranteed
Can be purchased as a simple interest bond or a compound interest bond
Can be redeemed at any time before maturity

33
Q

Mortgage backed securities (MBSs):

A

represent a pool of CMHC-insured residential mortgages that are issued by banks and other financial institutions

A guaranteed flow-through investment
Attractive to investors seeking income
Can be sold in the secondary market
Issued with a term to maturity of between 1 and 10 years
Subject to prepayment risk
34
Q

Strip Bonds

A

long-term debt securities issued by the Government of Canada (and some provinces) that do not offer coupon payments

Can be sold at a very deep discount
Although not paid, interest must be recognized every year
Very safe investment in terms of default risk and can be sold in the secondary market
Very high interest rate risk

35
Q

Real Return Bonds

A

long-term debt securities issued by the Government of Canada that protect you from inflation risk

All other bonds are exposed to inflation risk
The par value of the bond is adjusted for changes in the inflation rate
Coupon payments will increase with each increase in the face value

36
Q

Return from Investing in Bonds

A

Your return from investing in a bond depends on the price at the time you sell it

If the bond coupon rate is less than the current coupon rate on similar bonds, you must sell the bond at a discount
If the bond coupon rate is more than the current coupon rate on similar bonds, you can sell the bond for a premium

37
Q

Default Risk

A

Investors do not receive all of the coupon payments they are owed and may not receive all or any of the principal they are owed

38
Q

Risk premium:

A

the extra yield required by investors to compensate for default risk

39
Q

Default risk:

A

the risk that the borrower of funds will not repay the creditors

40
Q

Call (prepayment) risk:

A

the risk that a callable bond will be called

41
Q

Inflation risk:

A

the risk that the purchasing power of a bond investment will diminish due to a relative increase in inflation
Inflation decreases purchasing power because it reduces the real value of your investments

42
Q

Reinvestment Risk

A

the risk that the income earned from a bond cannot be reinvested at the same or a higher rate of interest as was being earned from the bond

43
Q

Interest rate risk:

A

the risk that a bond’s price will decline in response to an increase in interest rates

44
Q

Impact of a Bond’s Maturity on Its Interest Rate Risk

A

Bonds with longer terms to maturity are more sensitive to interest rate movements

45
Q

Selecting an Appropriate Bond Maturity

A

Choose maturities on bonds that reflect your expectations of future interest rates
Consider investing in bonds that have a maturity that matches the time when you will need the funds

46
Q

Interest rate strategy

A

selecting bonds based on interest rate expectations

Expect interest rates to decline, invest heavily in long-term bonds
Expect interest rates to increase, shift most of your money to bonds with short terms to maturity

47
Q

Passive strategy

A

investing in a diversified portfolio of bonds that are held for a long period of time

Valuable for investors who want to generate stable interest income over time and do not want to incur costs associated with frequent trading
-May reflect a portfolio of bonds with diversified risk levels

48
Q

Maturity matching strategy:

A

selecting bonds that will generate payments to match future expenses

49
Q

Bond investment strategies

A
  • interest rate strategy
  • passive strategy
  • maturity matching strategy.

FIN2303 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions