Chapter 8 - Fundamentals of Debt Securities Flashcards
Bondholders are also referred to as _______.
Bondholders are also referred to as creditors
$_____ is the par value for bonds.
$1,000 is the par value for bonds
Calculate the price of a corporate bond quoted at 98 ¾
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50
A bond trading at a price below par is a _______ bond.
A bond trading at a prcie below par is a discount bond
A bond trading at a price of $1,000 is a _____ bond
A bond trading at a price of $1,000 is a par bond
A bond trading at a price above par is a _____ bond.
A bond trading at a price above par is a premium bond.
What are two synonymous terms for a bond’s interest rate?
- Coupon Rate
- Nominal Yield
A bond with an 8% coupon would pay how much interest per year?
$80.00. Par x Rate ($1,000 x 8%)
Bond interest is stated ________ and paid __________.
Bond interest is stated annually and paid semi-annually.
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 _______.
When discussing a bond, the YTM may also be referred to as basis.
Credit risk measures the issuer’s risk of __________.
Credit risk measures the issuer’s risk of default on debt service.
_______ pay for bonds to be rated.
Issuers pay for bonds to be rated.
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody’s
Bonds rated _________ and higher are considered investment grade.
Bonds rated BBB (for S&P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.
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.
Bonds rated BB (Ba) or lower are considered speculative or junk bonds.
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
False.
There is an inverse relationship between interest rates and prices.
Given a yield change, _______ bonds move more in price.
Given a yield change, long-term bonds move more in price
(lower coupon or longer duration are also correct.)
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 rates
A type of maturity where all bonds mature on one specific date is called a _______ bond.
A type of maturity where all bonds mature on one specific date is called a 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?
0.01%
How do investors holding bearer bonds receive interest?
By 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.
The term Book Entry refers to the form of issuance where there are no physical certificates delivered.
True or False: Investors may exercise a bond’s call privilege any time after issuance.
False.
Only issuers may exercise the call privilege after the call protection period has passed.
The _____________ represents the amount above par that issuers pay to redeem bonds early.
The call premium represents the amount above par that issuers pay to redeem bonds early.
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, when using a catastrophe call
___________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding would most likely occur when interest rates have ________.
Refunding would most likely occur when interest rates have fallen.
When executing a refunding, into what account would the new issue proceeds be placed?
An escrow account managed by a trustee.
The money held in escrow from a refunding is invested in _____________.
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 bonds are more likely to have a sinking fund.
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.
Accrued interest on T-Notes and T-Bonds is calculated using actual days in the month and 365 days in the 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.
The longer/greater the duration, the greater the bond’s price sensitivity.
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?
YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 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.
The yield curve is inverted (negative/descending) when short-term bond yields are higher than long-term bonds.
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 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
What is the formula for calculating a bond’s current yield?
Annual Interest
÷
Current Market Price
