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Series 7 > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

Bondholders are also referred to as ____________.

A

creditors

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2
Q

$______ is the par value for bonds.

A

$1,000

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3
Q

Calculate the price of a corporate bond quoted at 98 ¾.

A

$987.50

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4
Q

A bond trading at a price below par is a __________ bond.

A

Discount Bond

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5
Q

A bond trading at a price of $1,000 is a ______ bond.

A

Par Bond

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6
Q

A bond trading at a price above par is a ____________ bond.

A

Premium

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7
Q

What are two synonymous terms for a bond’s interest rate?

A

Coupon rate and nominal yield

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8
Q

A bond with an 8% coupon would pay how much interest per year?

A

$80

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9
Q

Bond interest is stated ___________ and paid ________________.

A

annually; semi-annually

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10
Q

What is the formula for calculating current yield?

A

Annual Interest ÷ Current Market Price

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11
Q

What does yield-to-maturity (YTM) take into account that current yield does not?

A

Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money

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12
Q

When discussing a bond, the YTM may also be referred to as _______.

A

Basis

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13
Q

Credit risk measures the issuer’s risk of _________________________.

A

default on debt

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14
Q

_________ pay for bonds to be rated.

A

Issuers

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15
Q

What is the highest credit rating?

A

AAA

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16
Q

Bonds rated ___________ and higher are considered investment grade.

A

BBB or Baa

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17
Q

How does S&P and Moody’s further differentiate their ratings?

A

S&P uses + or - , while Moody’s uses 1, 2, 3.

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18
Q

Bonds rated BB (Ba) or lower are considered _______________________ bonds.

A

speculative or junk

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19
Q

True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.

A

false

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20
Q

Given a yield change, ____________ bonds move more in price.

A

long-term

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21
Q

Define real interest rate (real rate of return).

A

Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).

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22
Q

Which interest rates are generally more volatile?

A

short-term

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23
Q

A type of maturity where all bonds mature on one specific date is called a _______ bond.

24
Q

What is the maturity type where a portion of principal is retired each year?

A

Serial Bond

25
What does one basis point represent as a percentage?
.01% (.0001)
26
How do investors holding bearer bonds receive interest?
Clipping the attached coupons
27
How do investors receive interest on fully registered bonds?
Interest is mailed to the owner of record
28
The term ____________ refers to the form of issuance where there are no physical certificates delivered.
Book Entry
29
True or False: Investors may exercise a bond's call privilege any time after issuance.
False. Issuers exercise the call
30
The __________________ represents the amount above par that issuers pay to redeem bonds early.
Call Premium
31
Describe call protection.
The number of years after issuance during which bonds may not be called by the issuer
32
May bonds be called early due to an event which destroys the source of revenue backing the bond?
Yes, this is a catastrophe call
33
____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding
34
Refunding would most likely occur when interest rates have _________.
dropped
35
When executing a refunding, into what account would the new issue proceeds be placed?
Escrow
36
The money held in escrow from a refunding is invested in _________________________.
U.S. Government securities
37
What is the original issue that is being refunded called?
Prerefunded bonds
38
What is the impact on bonds that have been prerefunded?
Credit is improved and the issue is considered defeased for the issuer.
39
Are prerefunded bonds quoted on a yield-to-maturity (YTM) or yield-to-call (YTC) basis?
YTC
40
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
41
Are serial or term bonds more likely to have a sinking fund?
Term
42
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
43
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
44
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.
45
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
46
Are U.S. Government and municipal securities traded on an exchange or OTC?
OTC
47
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
48
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%)
49
The ________________ the duration, the greater the bond's price sensitivity.
longer
50
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
YTM, Current Yield, Nominal Yield
51
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
52
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%
53
Define duration.
The measure, expressed in years, of a bond's price sensitivity to interest rate changes
54
What does a normal, positive, ascending, or upward sloping yield curve indicate?
Bonds with longer maturities have higher yields than bonds with shorter maturities.
55
The yield curve is ___________________________ when short-term bonds have higher yields than long-term bonds.
inverted/descending
56
True or False: A flat yield curve reflects both long and short-term yields being the same.
True
57
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.

Series 7 (25 decks)

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