Chapter 6: bond valuation and interest rates part 1

Question 1

what can bonds be

Answer 1

1. bearer bonds or

2. registered bonds

Question 2

what is a bearer bond

Answer 2

is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered – no records are kept of the owner, or the transactions involving ownership.

Question 3

What is a registered bond

Answer 3

A bond whose owner is registered with the bond’s issuer. The owner’s name and contact information is recorded and kept on file with the company, allowing it to pay the bond’s coupon payment to the appropriate person.

Question 4

what are the characteristics of bonds

Answer 4

1. a fixed face value or par value
2. a fixed coupon
3. a fixed maturity date

Question 5

what is a fixed face value or par value

Answer 5

paid to the holder at maturity

Question 6

what is a fixed coupon

Answer 6

specifies the interest payable over the life of the bond

Question 7

how are fixe income securities often classified

Answer 7

according to maturity

Question 8

what are some fixed income securities

Answer 8

1. bills or paper
2. notes
3. bonds

Question 9

what are the time to maturity for bills or papers

Answer 9

maturities of less than one year

Question 10

what are the time to maturity for notes

Answer 10

maturities between 1 and 7 years

Question 11

what are the time to maturity for bonds

Answer 11

maturities greater than 7 years

Question 12

what is a bond indenture

Answer 12

is the contract between issuer and holder

Question 13

what does a bond indenture specify

Answer 13

1. details regarding payment terms
2. collateral
3. positive or negative covenants
4. par value or face value (usually increments of $1,000)
5. bond pricing, usually shown as the price per $100 of par value (which is equal to a percentage of the bond’s face value)

Question 14

what is term to maturity

Answer 14

time remaining to the maturity date

Question 15

what is the coupon rate

Answer 15

the annual percentage interest paid on the bond’s face value

Question 16

how are mortgage bonds secured

Answer 16

by real assets (like a house)

Question 17

are debentures secured?

Answer 17

they are either unsecured or secured, wit a floating charge over the firm’s assets

Question 18

collateral trust bonds are secured by what

Answer 18

pledged financial assets such as

• common stock
• other bonds or
• treasury bills

Question 19

equipment trust certificates are secured by what

Answer 19

pledged equipment, such as

- railway rolling stock

Question 20

what are covenants

Answer 20

another type of protective provision

Question 21

what are positive covenants

Answer 21

specify actions the firm agrees to do such as

• supply periodic f.s.
• maintain certain ratios

Question 22

what are negative covenants

Answer 22

specify actions the firm agrees to avoid such as

• restrictions on the size of its debt
• or acquiring or disposing of assets

Question 23

what are some additional bond features

Answer 23

1. call
2. retractable bonds
3. extendible bonds
4. sinking funds
5. convertible bonds

Question 24

what is a call

Answer 24

this feature allows the issuer to redeem or pay off the bond prior to maturity

Question 25

what is retractable bonds

Answer 25

allows the holder to extend bonds back to the issuer before maturity

A bond that features an option for the holder to force the issuer to redeem the bond before maturity at par value.

Question 26

what is sinking funds

Answer 26

are funds set aside by the issuer to ensure the firm is able to redeem the bond at maturity

Question 27

what are convertible bonds

Answer 27

can be converted to common stock at a pre-determined conversion price