Chapter 7 Flashcards
What are unique features of bonds?
I.) It is debt rather than an ownership interest.
II.) Payment of interest is a ‘cost of doing business’ therefore, tax deductible.
III.) It is classified as a liability when unpaid.
What is the interest rate risk?
It is the risk arising from interest rate fluctuations that affect bond valuation.
What affects the Interest rate risk?
The Time to maturity as well as the coupon rate.
What are notes?
Bonds with 10 years or less until maturity.
What is unfunded debt?
Debt that expires within a year.
What is a debenture?
A type of bond which is unsecured (no property pledge).
Who manages the repayment of a bond?
A sinking fund.
Which type of rate is adjusted for inflation.
A real rate.
What affects the shape of the term structure?
I.) Inflation: when inflation is expected to rise, so will rates.
II.) Real rate of interest: time value of money.
III.) Interest rate risk.
What is the yield curve?
It is the plotted yield against time.
What do bonds price in?
I.) Iliquidity premium
II.) Default risk
III.)Taxability
Which way does the term structure of bonds curve if the long term rate is greater than the short term?
Upward.
What is a coupon?
A promised interest payment on a bond.
How do you calculate a coupon?
Face value*coupon rate
If a bond is priced higher than it’s face value; what is it referred to as?
A premium bond.
If a bond is sold at face value, what do we call this?
A par value bond.
What may be seen in the terms of indenture?
-The face value
-What type of form it is (Bearer or registered)
-Amount of bonds issued.
-Description of Security
-Protective Covenants
-Call Provisions
What are the types of bond security?
Collateral, Mortgage, or debenture.
What are the pros of bearer form bonds?
Easy transfer of ownership.
What is a call provision?
The ability for a company to repurchase a bond at a stated price.
Who has preference of repayment in the case of liquidation?
-Senior debt
-Junior debt
Seniority has priority
What are ‘Stripped bonds’?
A form of bond where there are no coupon payments- in order to make this worth while they are priced at large discounts.
What is a TIP
A bond which has a rate tied to inflation.
What is a floating rate bond?
A floating rate bond has an interest rate tied to the T-bill rate.
