Chapter 2 : Debt Securities Flashcards
Debt Securities
Bonds
DO NOT REPRESENT OWNERSHIP
Represent debt obligation
Par Value Bond
1000
Interest Rate Bond
Same as Coupon Rate
Fixed rate percentage of par value
Bond Interest is Paid (how often)
Semi Annually
One Point of a bond is?
$10
Maturity Date =
Date a bond becomes due for repayment
Discount / Par / Premium
Less 1000
@1000
More 1000
Series Bonds
Different issue dates usually same maturity date
Term Bonds
Entire issue of bonds have the same maturity date
Serial Bonds
One issue date , Staggered maturity date(s)
Balloon Maturity
Large amount comes due near or on final maturity date
Bond Ratings
AAA Investment Grade
AA
A
BBB Speculative Grade
BB
B
CCC
CC
C
DDD
DD
AM Best
Rates insurance companies
Bond Taxation
Corporate Level
Fed State Local
Government
Fed
Municipal
Tax Free
Maturities Length
Short
1-3 Years
Medium
4-10 Years
Long
10+ Years
Discount Par Premium
Discount
Yield > Coupon
Par
Yield = Coupon
Premium
Yield < Coupon
Nominal Yield
= Coupon Rate
Current Yield
= Actual Income
Yield to maturity or basis
= Long Term Yield
Current Yield
Calculation
Annual Int / Market Price
Example
9% Bond @90
90/900 = 10%
Market Price Rises
Yield To Maturity goes
DOWN
Market Price Lowers
Yield to Maturity goes
UP
Bonds are fixed income because of
Interest Rate
Interest Rises
Outstanding bonds Lower
Inverse Reaction
Interest Lowers
Outstanding bonds Rise
Inverse Reaction
Bond Basis Point
1/100th of a point 0.01%
1% Change is 100 Basis Points
Discount
Basis (YTM) Higher than coupon rate
Yield > CP
Premium
Basis (YTM) Lower than coupon rte
Yield < CP
Par
Basis (YTM) Same as coupon rate
Yield = CP
Short Term
Quickest Reaction to Interest Rate
Safest
Long Term
Greatest Reaction to Interest Rate
Riskier
Bonds M Meaning
M = 1000
5M Bonds = 5000 worth of bonds
Bond Quote
6s of 28 @ 109
6% Coupon Rate
Maturity Date 2028
Dollar Price = 109
Accrued Interest
Amount of interest built up since last interest payment
Claculating Bond Interest when buying a bond
Current MP + Accrued Interest
Calculated 30 Day Month / 360 Day Year
Paid up to but not including the settlement date
1st and 15th of the month
1st= 30 Days
15th = 16 Days
Accrued Interest Appears for Both Buyer and Sellers
Added to the amount the buyer pays
Added to the amount the seller receives
Fundemental Corporate Bonds
Paid Semi Annually
Fully Taxable = Fed State & Local
Dealer / Principle Transaction
Leveraged Buyout
Takeover using borrowed funds
Spin Off
Subsidiary of a company becomes its own company
Holding Company
Owns enough voting shares to have an influence
Secured Bond
Secured by collateral
Mortgage Bonds
Secured by real property
Closed End Mortgage Bonds
Property cannot be used as collateral for future loans unless subsequent loans lesser in claim
Open End Mortgage Bonds
Property can be used as collateral.
All debt holds equal claim
More risk = higher reward
General Mortgage Bond
Pledge all assets no specific lots named
Equipment Trust Certificate
Not Callable
Serial form
Rarely default
Guarenteed / Parity Bond
Guarenteed by company other than issuer
Parity = Equal Claim and Rights
Debenture
Backed by good faith and credit
Unsecured with NO COLLATERAL
Subordinated Debenture
Holds lesser claim
Income / Junk / Fallen Angel Bonds
Risky Lack of Credit
Higher Coupon Rate
Low Quality Bonds Offer?
Higher Yield
Lower Price
Hight Quality Bonds Offer?
Lower Yield
Higher Price
Income or Adjustment Bonds
Considered Risky Investment
Called adjustment when used in corporate reorganization
Zero Coupon Bond
Sold at deep discount
Pays No interest while outstanding
One lump sum payout at maturity which includes initial investment and imputed interest
Phantom income = taxed annually based on value even though no income
Most Volatile Fixed Income Security
