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Series 7 > Chapter 2 Debt Securities > Flashcards

Chapter 2 Debt Securities Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Convertible bond price movement compared to stock

A

if a bond is convertible into common stock, the price of the bond will tend to move with the price of the stock. When the underlying stock increases the yield on the bond will decrease. (as bond prices increase bond yields decrease)

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2
Q

What would a company use to stabilize cash flow

A

Commercial Papers- this is unsecured short term corporate debt which has a maximum maturity date of 270 days

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3
Q

Bonds par value

A

$1000

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4
Q

Bond, coupon rate

A

Fixed rate percentage of par paid semi annually

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5
Q

Maturity Date

A

The date at which a bond comes due, The principal (par value) is generally repaid to the investor on the maturity date.

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6
Q

Series Bonds

A

Have different issue dates and usually the same maturity date. Used to fund different parts of a single project

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7
Q

Term Bonds

A

An entire issue of bonds that all have the same maturity date

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8
Q

Sinking Fund

A

Money will be set aside to repay the loan later. This is a provision of the stock and will increase the safety of paying it back therefore it will lower the yield (interest rate)

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9
Q

Serial Bonds

A

one issue date and multiple maturity dates

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10
Q

Balloon Maturity

A

a bond issue with a large amount of the issue that comes due at or near the final maturity date

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11
Q

Funded Debt

A

CORPORATE DEBT- must be due more that 1 year from issue date. Includes corporate bonds, notes and bank loans.
Does not include preferred stock, government bonds or municipal bonds

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12
Q

Registered Bonds

A

Bonds registered in the investor’s name and interest payment are sent directly to the investor by the corporation’s paying agent.
All bonds are currently issued as registered
Interest is paid directly to the investor
Principal sent directly to the owner at maturity

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13
Q

Bearer Bonds

A

Not registered and have coupons attached to the bond. To receive interest, investor must clip the coupon and present them to an authorized paying agent ( typically a bank). US bonds are no longer issued this way

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14
Q

Registered “as to Principal Only”

A

Investors name with coupons attached. Must present coupons to receive interest. US bonds are no longer issues in this form

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15
Q

Book Entry Form

A

Most bonds are held in this form
Ownership is represented electronically

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16
Q

Bond Ratings

A

AAA-highest rating
AA
A
BBB- lowest investment grade
BB- highest speculative grade
B
CCC
CC
C
DDD
DD- lowest rating

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17
Q

Bonds Ratings companies

A

Standard and Poor’s
Moody’s
Fitch

A.M. Best is not a bond rating agency (rates insurance companies)

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18
Q

Bond Maturities

A

Short term- 1-3 years
Medium term- 4-10 years
Long term- greater than 10 years

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19
Q

Accrued interest by type of bond

A

Corporate and Muni- 30 day calendar and 360 day year
Federal- calculated on actual days, 365 calendar days year

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20
Q

Coupon Rate

A

Fixed rate of interest that is paid to the investor based on the $1,000 bond value

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21
Q

Bond Yield

A

Takes into account the purchase price of the bond, interest rate and redemption value

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22
Q

Nominal Yield

A

Coupon or interest rate on the face of the bond

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23
Q

Current Yield Formula

A

Annual interest/market Price

This is a snap shot of gains right now

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24
Q

Yield to Maturity

A

Big Picture. This show the overall gain of the bond
takes into account purchase price, redemption value, coupon rate and time to maturity

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25
Q

Change in yield of a bond, basis point

A

1 basis point is equal to 0.01%. a change of a 1% for a bond is 100 basis points

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26
Q

Short term bond characteristic

A

React quickly to interest rate changes but do not change as much. therefore they are considered safer and more stable

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27
Q

Long Term Bonds Characteristics

A

React slower to interest rate changes but will have a greater change. This causes them to carry more risk then short term bonds

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28
Q

Duration

A

is a measure of the sesitivity of a bond’s market price to changes in interest rates. ie a bond with a duration of 5 will have a price movement of 5% for every 1% movement in interest rates

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29
Q

Bond Trading “M”

A

5M bonds would be 5 bonds or $5,000 worth of bonds not 5000 bonds each worth $1,000

30
Q

Bond Quote example
6s of 28 @ 109

A

6% coupon rate
maturity of 2028
selling at 1090

31
Q

Bond Settlement date

A

is 2 business days after the trade date

32
Q

Accrued Interest appears on both confirmations

A

Added to the amount the buyer pays
Added to the amount the seller recieves

33
Q

Accrued interest and basis

A

Accrued interest paid is not added to basis
it is deducted from interest received on the years taxes that interest is next paid

34
Q

Bondholder and owners

A

Bond are a debt interest so the bond holder is not considered an equity owner

35
Q

Corporate Bond interest taxes

A

Fully taxable to federal, state and local level

36
Q

Corporate bond trading

A

Most are traded over the counter

37
Q

Corporate bonds- Leveraged buy outs

A

A takeover company borrows funds and uses the assets of the company being taken over as collateral

38
Q

Holding Company

A

When a corporation owns enough voting rights of another that it can influence the companies policies, management and board of directors

39
Q

Trust Indenture act of 1939

A

Requires all corporate bonds must specified the rights and duties of the issuer, underwriter, and investor. Also the issuer must appoint a trustee to represent and protect the bondholder.
Act does not regulate:
Federal Government issue
Municipal issues
Private placement
Unit Investment Trusts (UITs)

40
Q

Secured Bonds

A

Bonds secured by a guarantee or collateral of some sort

41
Q

Mortgage Bonds

A

Secured bonds that a back by real property as collateral

42
Q

Closed end
Open end
general mortgage bonds

A

Closed end- Can not be used as collateral for another loan unless the new loan has a lesser claim
Open end- All Debts have an equal claim on the collateral
General- A mortgage bond that pledges all mortgageable properties of a corporation as collateral but does not name a specific lot

43
Q

Equipment Trust Certificate

A

Generally used by transportation companies (trains, airplanes, trucks) to purchase new equipment and uses the new property to secure the loan. Usually not callable, issued in serial form and rarely even default

44
Q

Collateral Trust Certificate

A

Uses securities of another corporation that the issuer owns as collateral

45
Q

Guaranteed Bonds

A

Bonds that are guaranteed by a company other than the company that is issuing them, typically a parent company

46
Q

Parity Bonds

A

Bonds that have equal claims on assets as bonds that were previously issued. Similar to open end mortgage bond

47
Q

Debentures

A

Debt obligation of a corporation backed only by the full faith and credit of the corporation itself and not by any specific asset of the corporation

48
Q

Subordinated Debentures

A

holds a lesser or “junior” claim than other debentures

49
Q

Fallen Angles bonds

A

Bonds that were originally issued as investment grade but have been downgraded to a junk bond rating

50
Q

Zero Coupon Bonds

A

Bonds that sell at a large discount but do not pay semi-annual interest
At maturity they pay 1 lump sum
create “phantom interest that is taxed annually
Used for investors seeking to accumulate capital
are the most volatile of all fixed income securities

51
Q

Zero Coupon bond example:
ABC zr 27

A

ABC- is the corporation
zr- is that it is a 0 coupon
27 - it matures in 2027

52
Q

Callable bonds

A

A bond that is callable at the option the issuer.
Not a positive to investors (not good for investors on a fixed income)
The higher the coupon rate on the bond the more likely it will be called
Bond and Preferred stock may be callable, common stock is NEVER callable

53
Q

Call Protection

A

a time period in which bonds may not be called by the issuer

54
Q

When a company calls a bond…

A

Bondholder recieves a call premimum plus the accrured interest
The company’s credit worthiness improves (less debt)
debt to net worth ratio improves (since it decreases)

55
Q

Prior to calling a bond, issuer must…

A

Give a notice of call that states the date the bond will be redeemed. The investor can then convert (if convertible), sell the bond, or wait for the redemption date.

56
Q

Convertible Bond

A

Bonds that can converted to shares of the common stock at the option of the bondholder
Not taxable until the common stock is sold

57
Q

Parity Calculation

A

Par Value/Conversion price=Common shares produced

Market price of bonds or preferred shares/common shares produced= parity of common stock
OR
Common Shares produced * mtk price of common shares= parity of bond or preferred stock

Par for bond = $1,000
Par for preferred stock = $100

58
Q

Refunding Bonds

A

The sale of a new issue of bonds used to pay off (retire) and outstanding issue of bonds
Does not change capitalization since debt remains the same

59
Q

Why refund bonds?

A

Sharpe decline on interest rates

To pay of convertible bonds to reduce the prospective dilution effect on common stock if they were converted

60
Q

Collateralized Mortgage Obligations (CMOs)

A

a bond that is secured b a pool of mortgage loans. These are a mortgage-backed security
Historically has been a safe investment
pays income on a monthly basis
Often used by investors in a low tax bracket to supplement monthly income
Considered a derivative security

61
Q

Issuers of CMOs

A

Ginnie Mae
Freddie Mac
Fannie Mae
FHA mortgage loans
Conventional/private mortgage issuers

NOT issued by Sally Mae

62
Q

CMO Tranches

A

CMOs pay off 1 tranche at a time in order of maturity.
Z-Bond is the final tranche of a CMO and recieves no cash until earlier tranches are paid in full
CMO tranches that pay a variable interest rate are usually measured to the LIBOR
CMOs trade over the counter with mark ups or mark down

63
Q

CMO Risk Considerations

A
  • Credit Risk- Historically low since they are guaranteed by US government sponsoring agencies and have a AAA rating
  • Interest rate/Market Risk- If rates decline CMO prices will increase, mortgages will be refinanced and prepayment will occur. If rates rise cmos with lower rates will be less desirable
    -Maturity risk- implied call risk- risk the principal will be returned earlier than anticipated.
    Extension risk- The maturity of the risk will be extended further then originally expected
64
Q

CMO advertising

A

Must not contain comparison to CDs
Must prominently display the final maturity date of the securities
Must include a description of the initial issue tranche

65
Q

Agency CMOs

A

CMOs guaranteed by Fannie Mae (FNMA), Freddie Mac (FHLMC) and Ginnie Mae(GNMA)

Ginnie Mae are comprised of FHA and VA mortgages that are guaranteed against default

66
Q

Collateralized Debt Obligations (CDOs)

A

Structured debt that is backed by a pool of assets (including mortgages). Generally traded by their average life rather then stated maturities

67
Q

Money Market

A

High quality, short term (12 months or less) debt instrument. Can be treasury bill, CDs, Commercial paper, or Banker’s acceptance

68
Q

Treasury Bills

A

Most liquid of all money market instruments

69
Q

Negotiable Certificates of Deposit (CDs)

A

Time deposits
Guaranteed by commercial banks
$100,000 minimum
Usually trade +interest (interest is added on top of the sold certificate price
Eurodollar CDs are used by banks outside the US but the interest and principal are paid in US dollars
(Not all CDs are short term can be 3, 5, and 10 years as well)

70
Q

Commercial Papers

A

Unsecured Promissory note issued at a discount
Repaid from account receivables
Maturity maximum of 270 days
NOT FDIC INSURED

71
Q

Bankers Acceptance

A

Used to finance foreign trade
Least liquid of al money market instruments

72
Q

Exchange risk

A

Is associated with foreign and sovereign debt instruments, not US or domestic debt issues

Series 7 (20 decks)

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