Chapter 6: An Introduction to Debt Instruments

Question 1

Debt Instrument

Answer 1

Written agreement/formal promise that allows the issuer to generate capital by vowing to pay back the lender according to the stipulations of the agreement

Question 2

What are some examples of long term debt instruments?

Answer 2

Bonds, mortgages, and long-term loans

Question 3

What are some examples of medium/short term debt instruments?

Answer 3

Working loans, treasury bills, and short-term loans

Question 4

Bond

Answer 4

Fixed-yield financial tool that characterizes credit extended by an investor to a debtor, generally governmental or commercial entities

Question 5

Term Bonds

Answer 5

Requires repayment of the principal sum at a single maturity date

Question 6

Sinking Fund

Answer 6

Investment pool specifically designated to earmark monetary reserves that will be used to settle the debt as it comes due and payable

Question 7

Serial Bonds

Answer 7

Requires payments in installments over a period of time

Question 8

Zero-Coupon Bond

Answer 8

Holder does not receive interest but trades at a deep discount and investor receives profit at maturity

Question 9

What is an example of a zero-coupon bond?

Answer 9

Treasury bills

Question 10

Zero-coupon bonds eliminate what?

Answer 10

Reinvestment risk

Question 11

Bond Maturity

Answer 11

Point in time where the holder of the bond will receive a return that includes interest

Question 12

Is the interest earned from zero-coupon bonds taxed?

Answer 12

Yes

Question 13

How does interest accumulate for zero-coupon bonds?

Answer 13

Semi-annually at a predetermined rate

Question 14

Carrying Value

Answer 14

Face value adjusted for any premium or discount