Chapter 8 Flashcards
Bondholders are also referred to as ____________.
creditors
$______ is the par value for bonds.
$1,000
Calculate the price of a corporate bond quoted at 98 ¾.
$987.50
A bond trading at a price below par is a __________ bond.
Discount Bond
A bond trading at a price of $1,000 is a ______ bond.
Par Bond
A bond trading at a price above par is a ____________ bond.
Premium
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
A bond with an 8% coupon would pay how much interest per year?
$80
Bond interest is stated ___________ and paid ________________.
annually; semi-annually
What is the formula for calculating current yield?
Annual Interest ÷ Current Market Price
What does yield-to-maturity (YTM) take into account that current yield does not?
Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money
When discussing a bond, the YTM may also be referred to as _______.
Basis
Credit risk measures the issuer’s risk of _________________________.
default on debt
_________ pay for bonds to be rated.
Issuers
What is the highest credit rating?
AAA
Bonds rated ___________ and higher are considered investment grade.
BBB or Baa
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
speculative or junk
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
false
Given a yield change, ____________ bonds move more in price.
long-term
Define real interest rate (real rate of return).
Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).
Which interest rates are generally more volatile?
short-term
A type of maturity where all bonds mature on one specific date is called a _______ bond.
term bond
What is the maturity type where a portion of principal is retired each year?
Serial Bond
What does one basis point represent as a percentage?
.01% (.0001)
How do investors holding bearer bonds receive interest?
Clipping the attached coupons
How do investors receive interest on fully registered bonds?
Interest is mailed to the owner of record
The term ____________ refers to the form of issuance where there are no physical certificates delivered.
Book Entry
True or False: Investors may exercise a bond’s call privilege any time after issuance.
False. Issuers exercise the call
The __________________ represents the amount above par that issuers pay to redeem bonds early.
Call Premium
Describe call protection.
The number of years after issuance during which bonds may not be called by the issuer
May bonds be called early due to an event which destroys the source of revenue backing the bond?
Yes, this is a catastrophe call
____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding
Refunding would most likely occur when interest rates have _________.
dropped
When executing a refunding, into what account would the new issue proceeds be placed?
Escrow
The money held in escrow from a refunding is invested in _________________________.
U.S. Government securities
What is the original issue that is being refunded called?
Prerefunded bonds
What is the impact on bonds that have been prerefunded?
Credit is improved and the issue is considered defeased for the issuer.
Are prerefunded bonds quoted on a yield-to-maturity (YTM) or yield-to-call (YTC) basis?
YTC
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
Are serial or term bonds more likely to have a sinking fund?
Term
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
Describe inflation or purchasing power risk.
The risk that today’s investment will not be worth as much when the money is received in the future.
Accrued interest on T-Notes and T-Bonds is calculated using ______ days in the month and _____ days in the year.
actual days in month; 365 days in year
Are U.S. Government and municipal securities traded on an exchange or OTC?
OTC
Define defeasance as it relates to callable bonds.
A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient to pay debt service
What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.
$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)
The ________________ the duration, the greater the bond’s price sensitivity.
longer
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
YTM, Current Yield, Nominal Yield
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?
less than 10%, since it’s current at 10%
Define duration.
The measure, expressed in years, of a bond’s price sensitivity to interest rate changes
What does a normal, positive, ascending, or upward sloping yield curve indicate?
Bonds with longer maturities have higher yields than bonds with shorter maturities.
The yield curve is ___________________________ when short-term bonds have higher yields than long-term bonds.
inverted/descending
True or False: A flat yield curve reflects both long and short-term yields being the same.
True
What is the dollar price of a T-bond with a bid of 98-24?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
