Chapter 6 Flashcards
Long-term debt obligation issued by corporations and government units.
bonds
Markets that trade debt (bonds and mortgages) and equity (stocks) instruments with maturities of more than one year.
capital markets
A Treasury security in which the periodic interest payment is separated from the final principal payment.
STRIPS
types of bonds (4)
- treasury bonds
- municipal bonds
- corporate bonds
- agency bonds
- Par value is indexed to the Consumer Price Index
- Eliminate inflation risk
Treasury Notes and Bonds: TIPS
As par value changes:
– End payoff increases
– Coupon payment increase
Who issues municipal bonds?
state and local governments
The government-sponsored enterprise responsible for guaranteeing and funding home mortgages
Fannie Mae
A government supervised enterprise established to purchase primarily conventional mortgage loans in the secondary mortgage market.
Freddie Mac
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.
Ginnie Mae
- Zero coupon, derived from Notes and Bonds
- Eliminate interest rate risk
Treasury Notes and Bonds: STRIPS
- Federal income tax
- State income tax (in issuing state)
- Only includes coupon payments
- After-tax yield
- Taxable equivalent yield
Qualified bonds are tax exempt
- Backed by taxing authority
- Generally “low” default risk
- Taxing authority may be limited (more risk)
General obligation bonds
- Backed by specific project (i.e. toll road)
- Covenants enforced by a Trustee
Revenue bonds
long term debt issued by corporations; generally fixed term
Corporate bonds
___: less than 10 years
___: more than 10 years
Notes; bonds
- Firm commitments
- Best efforts
Underwriting
bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity
Callable bonds
bonds with a provision that allows investors to sell them back to the company prior to maturity at a prearranged price
Puttable bonds
Bonds scheduled for payment (maturity) at a single specified date.
Term bonds
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
Serial bonds
Bonds made payable to whoever holds them, also called unregistered bonds
Bearer bonds
Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners
Registered bonds
Coupon rate pegged to external interest rate
- Fed Funds / LIBOR
Floating-rate bonds
Implicit capital appreciation is taxable
Zero-coupon bond
Owners can exchange bond for equity
Convertible bonds
Conversion ratio =
par value / conversion price
Parity price (bond) =
conversion ratio * stocks price
Parity price (stock) =
bond market value / conversion ratio
Outline things the company is obligating itself to do or not do in order to protect bondholders.
Covenants bonds
a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year
Sinking-fund provision
Bonds can be classified according to whether they are secured by __ and by the nature of that __
Collateral
- Investment grade bonds
- Non-investment grade (junk bonds)
- Firm characteristics vs. Bond characteristics
Credit ratings
Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only —-
Investment grade bonds
a special type of high interest-rate bond that carries higher inherent risks
Non-investment grade (junk bonds)
length of time until bond matures (term), credit risk
Bond characteristics
- Wide dispersion in liquidity
- Broker market
- Few transactions below $1 million
Secondary market
