Chapter 6 Flashcards

1
Q

Long-term debt obligation issued by corporations and government units.

A

bonds

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1
Q

Markets that trade debt (bonds and mortgages) and equity (stocks) instruments with maturities of more than one year.

A

capital markets

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2
Q

A Treasury security in which the periodic interest payment is separated from the final principal payment.

A

STRIPS

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3
Q

types of bonds (4)

A
  • treasury bonds
  • municipal bonds
  • corporate bonds
  • agency bonds
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4
Q
  • Par value is indexed to the Consumer Price Index
  • Eliminate inflation risk
A

Treasury Notes and Bonds: TIPS

As par value changes:
– End payoff increases
– Coupon payment increase

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5
Q

Who issues municipal bonds?

A

state and local governments

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6
Q

The government-sponsored enterprise responsible for guaranteeing and funding home mortgages

A

Fannie Mae

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7
Q

A government supervised enterprise established to purchase primarily conventional mortgage loans in the secondary mortgage market.

A

Freddie Mac

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8
Q

A government agency that plays an important role in the secondary mortgage market it guarantees mortgage backed securities using FHA insured and VA guaranteed loans as collateral.

A

Ginnie Mae

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9
Q
  • Zero coupon, derived from Notes and Bonds
  • Eliminate interest rate risk
A

Treasury Notes and Bonds: STRIPS

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10
Q
  • Federal income tax
  • State income tax (in issuing state)
  • Only includes coupon payments
  • After-tax yield
  • Taxable equivalent yield
A

Qualified bonds are tax exempt

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11
Q
  • Backed by taxing authority
  • Generally “low” default risk
  • Taxing authority may be limited (more risk)
A

General obligation bonds

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12
Q
  • Backed by specific project (i.e. toll road)
  • Covenants enforced by a Trustee
A

Revenue bonds

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13
Q

long term debt issued by corporations; generally fixed term

A

Corporate bonds

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14
Q

___: less than 10 years
___: more than 10 years

A

Notes; bonds

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15
Q
  • Firm commitments
  • Best efforts
A

Underwriting

16
Q

bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity

A

Callable bonds

17
Q

bonds with a provision that allows investors to sell them back to the company prior to maturity at a prearranged price

A

Puttable bonds

18
Q

Bonds scheduled for payment (maturity) at a single specified date.

A

Term bonds

19
Q

Bonds that mature on a series of dates, with a portion of the issue paid off on each.
- May pay par value at multiple specified dates

A

Serial bonds

20
Q

Bonds made payable to whoever holds them, also called unregistered bonds

A

Bearer bonds

21
Q

Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners

A

Registered bonds

22
Q

Coupon rate pegged to external interest rate
- Fed Funds / LIBOR

A

Floating-rate bonds

23
Q

Implicit capital appreciation is taxable

A

Zero-coupon bond

24
Owners can exchange bond for equity
Convertible bonds
25
Conversion ratio =
par value / conversion price
26
Parity price (bond) =
conversion ratio * stocks price
27
Parity price (stock) =
bond market value / conversion ratio
28
Outline things the company is obligating itself to do or not do in order to protect bondholders.
Covenants bonds
29
a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year
Sinking-fund provision
30
Bonds can be classified according to whether they are secured by __ and by the nature of that __
Collateral
31
- Investment grade bonds - Non-investment grade (junk bonds) - Firm characteristics vs. Bond characteristics
Credit ratings
32
Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only ----
Investment grade bonds
33
a special type of high interest-rate bond that carries higher inherent risks
Non-investment grade (junk bonds)
34
length of time until bond matures (term), credit risk
Bond characteristics
35
- Wide dispersion in liquidity - Broker market - Few transactions below $1 million
Secondary market
36