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Finance 3300 > Chapter 15 > Flashcards

Chapter 15 Flashcards

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1
Q

What is a bond?

A

corporation’s written pledge to repay a specific amount of money, with interest

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2
Q

What is the bond’s maturity date?

A

date at which the face value (usually $1,000) will be repaid

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3
Q

Bondholders receive interest payments every

A

six months at the stated interest rate (coupon rate)

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4
Q

What is a bond indenture?

A

describes legal conditions surrounding bond

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5
Q

Define trustee.

A

financially independent firm that acts as the bondholder’s representative.

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6
Q

Why do corporations issue bonds? (5)

A

improve financial leverage, increasing ROI; when it’s difficult to sell stock; interest paid to bondholders is tax-deductible business expense; bonds must be repaid and interest is mandatory; superior claim to assets over stockholders

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7
Q

Describe a debenture bond.

A

unsecured; backed only by reputation of issuing company

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8
Q

Most corporate bonds are what kind of bond?

A

debenture bond

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9
Q

What are the five types of bonds?

A

debenture bond; mortgage bond; subordinated debenture bond; convertible bond; high yield bond

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10
Q

Describe a mortgage bond.

A

corporate bond that is secured by various assets of the issuing firm, usually real estate;

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11
Q

Why is a mortgage bond’s interest rate lower?

A

because it is secured by collateral and corporate assets

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12
Q

Describe a subordinated debenture bond. (2)

A

unsecured bond that gives bondholders a claim secondary to that of mortgage or debenture bond holders with respect to interest payments and claim on assets; more risk to investor, so higher coupon rate

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13
Q

Describe a convertible bond.

A

kind of corporate bond that can be exchanged (at owner’s option) for a specified number of shares of the corporation’s common stock

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14
Q

What are some features of a convertible bond? (3)

A

lower interest rate coupon; attracts more investors, yet most don’t convert; if converted, corporation does not have to repay bond at maturity

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15
Q

Describe a high yield bond.

A

bond that pays a higher rate of interest but has a higher risk of default.

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16
Q

What is another name for a high yield bond?

A

junk bond

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17
Q

Describe the call feature of bonds. (2)

A

corporation can call in or buy back outstanding bonds from bondholders before maturity; most firms agree to not call back bonds for first 5-10 years

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18
Q

Under what circumstances would a bond be called back?

A

if their coupon rate is much higher than the going market rate

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19
Q

(T/F) Most corporate bonds are not callable.

A

False, most of them ARE callable

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20
Q

Is the coupon rate higher or lower for callable bonds?

A

higher, because of call risk

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21
Q

Define sinking fund.

A

fund with money deposited annually or semiannually that is used to pay off bondholders when bond issue comes up

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22
Q

Define serial bond.

A

bonds of a single issue that mature on different dates

23
Q

Investors receive bond interest every

A

6 months

24
Q

The annual interest generated by a bond is computed by

A

multiplying interest rate by face value of bond

25
Q

Describe registered bonds.

A

registered in owner’s name

26
Q

Describe registered coupon bonds.

A

registered owner collects principal, but anyone with coupon can collect interest

27
Q

Describe bearer bonds.

A

person in physical possession collects (no longer issued in USA)

28
Q

Describe zero-coupon bonds.

A

bonds sold at deep discount; makes zero coupon payments and is redeemed for face value at maturity

29
Q

What is the formula for approximate market value of a bond?

A

($ annual interest) / (comparable interest rate)

30
Q

What commission is typically made on the sale of a $1,000 bond?

A

$5-$35

31
Q

(T/F) Interest and capital gains cannot be taxed in the context of bonds.

A

False, they can be taxed.

32
Q

Describe bond taxation at the federal level on bonds.

A

no state or local income tax on the interest

33
Q

Describe bond taxation at the state level on bonds.

A

usually only federal tax

34
Q

Describe bond taxation at the municipal level on bonds.

A

no tax at any level

35
Q

Describe Treasury Bills (T-Bills). (3)

A

$100 minimum @ $100 increments; 4/13/26/52 weeks to mature; sold at discount

36
Q

Describe Treasury Notes (T-Notes). (3)

A

$100 units like T-Bills; 2/3/5/7/10 year terms; interest paid every 6 months

37
Q

Describe Treasury Bonds.

A

$100 units like T-Bills; 20-30 year maturity; interest rates higher than T-Bills or T-Notes; interest paid every 6 months; held at maturity or sold before maturity

38
Q

Describe Treasury Inflation-Protected Securities (TIPS).

A

$100 units like T-Bills; 5/10/30 year terms; value based on CPI (when CPI rises, principal adjusts upward); interest paid every 6 months; held at maturity or sold before maturity

39
Q

Fannie Mae is short for

A

Federal National Mortgage Association

40
Q

Ginnie Mae is short for

A

Government National Mortgage Association

41
Q

Freddie Mac is short for

A

Federal Home Loan Mortgage Corporation

42
Q

Describe the features of federal agency debt loans.

A

higher risk than Treasury securities, so higher interest rates paid; 1-30 years with 12 year average duration; minimum denominations between $5,000 and $25,000; agency debt is callable before maturity

43
Q

Municipal bonds are issued by

A

state/local government

44
Q

Define general obligation bonds.

A

backed by state or local government that issues them

45
Q

Define revenue bonds.

A

repaid from money generated by the project the funds finance, such as a toll bridge

46
Q

Are municipal bonds callable?

A

maybe, but usually not until after the first 5 or 10 years

47
Q

Is the yield higher with municipal bonds?

A

yes, because interest earned may be exempt from federal income tax

48
Q

What is the formula for taxable equivalent yield in municipal bonds?

A

(tax-exempt yield) / (1.0 - MTR)

49
Q

What does the rearrangement of the tax equivalent yield equation give you?

A

a formula to calculate after tax yield: tax-exempt yield = (tax equivalent yield) * (1.0 - your MTR)

50
Q

Bond ratings provide

A

quality and risk associated with bond issues

51
Q

Bond ratings range from

A

AAA to D, with AAA being the best

52
Q

Define bond yield.

A

rate of return earned by an investor who holds a bond for a stated period

53
Q

current yield on corporate bond =

A

annual income amount / current market value

54
Q

yield-to-maturity =

A

write out Chapter 15, Slide 26

Finance 3300 (15 decks)

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