Chapter 2: Debt securities Flashcards
True or False: Bonds represent ownership interest in the issuing company
False. Bonds do not represent ownership. The investor in a bond becomes a creditor of the issuing company.
Common stock would be a good example of a security where holding does represent ownership.
How often do bondholders receive interest payments from the issuer?
A) Quarterly
B) Semi-Annually
C) Annually
D) Bondholders do not receive interest payments
B) Bondholders receive interest payments semi-annually at a fixed rate
Calculate the semi-annual interest payment on a 9% coupon bond with a $1000 par value.
1000x.09=90/2 = $45 semi-annual payment
The Par Value of Bond A is $1000. Bond A is traded at a premium price of $1200. How much will the investor holding Bond A be paid upon the maturity date?
$1000. Despite paying $1200 for the bond, the investor will only be paid for Par Value at maturity.
Who would be the issuer of a municipal bond?
State and local governments
What is the formula for current yield?
Current Yield on Bonds = ? / ?
Annual interest / Market Price
Current yield is the actual income that an investor will receive.
When calculating current yield (income) on a bond, how would you first calculate the annual interest?
Annual interest = coupon rate (nominal yield) x par value
Name 2 kinds of fixed income securities.
Preferred stock and bonds
Why would market price of outstanding bonds go up when coupon (interest) rates go down?
Inverse Reaction; the market price of outstanding bonds would go up, as these bonds issued at the previously higher fixed interest rate would be more valuable than the newly issued bonds at a lower fixed interest rate.
Bond ABC currently has a coupon (interest) rate of 8% and a Basis (Yield) of 7.5%. Bond ABC is selling at:
A) Par
B) A Premium
C) A Discount
B) Bond ABC is selling at a premium.
Calculate the dollar price of a corporate bond trading @ 98 1/2.
$985
What kind of securities does the Trust Indenture Act of 1939 apply to?
A: Municipal issues
B: Government issues
C: Private Placements
D: Corporate issues
D: Corporate issues.
The act requires all corporate bonds and debentures (corporate debt) to be issued under deed of trust. Specifies rights and duties of an issuer, underwriter, and investor. Issuer must appoint a trustee who will rep/protect the bondholders
What is the riskiest kind of Corporate Bond for the investor?
Income Bonds (AKA Adjustment Bonds).
These are issued by companies looking to avoid bankruptcy. They promise to pay interest ONLY with sufficient* earnings and if the board of directors declares interest to be paid.
No assurance of interest/ semi annual coupon payment. Principal is still due at maturity.
What is the most volatile kind of fixed income security?
Zero-coupon bonds. (zr)
Their market price has a high volatility because they are issued at a discount; they do not pay interest semi-annually; their accreted value from imputed interest is not paid until maturity.
Interest/Coupon-bearing bonds offer more price stability since typically issued at par value; pay semi-annual interest; no imputed interest
What is the Par Value ($) of a bond?
$1000 is the Par value of a Bond unless otherwise stated (discount, premium, etc)
