Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

STC Cards > Chapter 8 - Fundamentals of Debt Securities > Flashcards

Chapter 8 - Fundamentals of Debt Securities Flashcards

1
Q

Bondholders are also referred to as _______.

A

Bondholders are also referred to as creditors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

$_____ is the par value for bonds.

A

$1,000 is the par value for bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Calculate the price of a corporate bond quoted at 98 ¾

A

Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

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

A

A bond trading at a prcie below par is a discount bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

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

A
  • Coupon Rate
  • Nominal Yield
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

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

A

$80.00. Par x Rate ($1,000 x 8%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Bond interest is stated ________ and paid __________.

A

Bond interest is stated annually and paid semi-annually.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Credit risk measures the issuer’s risk of __________.

A

Credit risk measures the issuer’s risk of default on debt service.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

_______ pay for bonds to be rated.

A

Issuers pay for bonds to be rated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the highest credit rating?

A

AAA for S&P and Fitch, and Aaa for Moody’s

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Bonds rated _________ and higher are considered investment grade.

A

Bonds rated BBB (for S&P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
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.

There is an inverse relationship between interest rates and prices.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

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

A

Given a yield change, long-term bonds move more in price

(lower coupon or longer duration are also correct.)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
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%).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Which interest rates are generally more volatile?

A

Short-term rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

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

A

Serial bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What does one basis point represent as a percentage?

A

0.01%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

How do investors holding bearer bonds receive interest?

A

By clipping the attached coupons

26
Q

How do investors receive interest on fully registered bonds?

A

Interest is mailed to the owner of record.

27
Q

The term ________ refers to the form of issuance where there are no physical certificates delivered.

A

The term Book Entry refers to the form of issuance where there are no physical certificates delivered.

28
Q

True or False: Investors may exercise a bond’s call privilege any time after issuance.

A

False.

Only issuers may exercise the call privilege after the call protection period has passed.

29
Q

The _____________ represents the amount above par that issuers pay to redeem bonds early.

A

The call premium represents the amount above par that issuers pay to redeem bonds early.

30
Q

Describe call protection.

A

The number of years after issuance during which bonds may not be called by the issuer

31
Q

May bonds be called early due to an event which destroys the source of revenue backing the bond?

A

Yes, when using a catastrophe call

32
Q

___________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.

A

Refunding refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.

33
Q

Refunding would most likely occur when interest rates have ________.

A

Refunding would most likely occur when interest rates have fallen.

34
Q

When executing a refunding, into what account would the new issue proceeds be placed?

A

An escrow account managed by a trustee.

35
Q

The money held in escrow from a refunding is invested in _____________.

A

The money held in escrow from a refunding is invested in U.S. Government securities.

36
Q

What is the original issue that is being refunded called?

A

Prerefunded bonds

37
Q

What is the impact on bonds that have been prerefunded?

A

Credit is improved and the issue is considered defeased for the issuer.

38
Q

Are prerefunded bonds quoted on a yield-to-maturity (YTM) or yield-to-call (YTC) basis?

A

YTC

39
Q

Into what does an issuer periodically set aside money for retiring debt?

A

Sinking fund

40
Q

Are serial or term bonds more likely to have a sinking fund?

A

Term bonds are more likely to have a sinking fund.

41
Q

What does a put feature on a bond allow?

A

Bondholders may put (redeem) the bond back to the issuer prior to maturity.

42
Q

True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.

A

True

43
Q

Describe inflation or purchasing power risk.

A

The risk that today’s investment will not be worth as much when the money is received in the future.

44
Q

Accrued interest on T-Notes and T-Bonds is calculated using ______ days in the month and _____ days in the year.

A

Accrued interest on T-Notes and T-Bonds is calculated using actual days in the month and 365 days in the year.

45
Q

Are U.S. Government and municipal securities traded on an exchange or OTC?

A

OTC

46
Q

Define defeasance as it relates to callable bonds.

A

A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient to pay debt service

47
Q

What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.

A

$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%)

48
Q

The __________ the duration, the greater the bond’s price sensitivity.

A

The longer/greater the duration, the greater the bond’s price sensitivity.

49
Q

Rank in order, from highest to lowest, the three yields on a bond priced at a discount.

A

YTM, Current Yield, Nominal Yield

50
Q

Rank in order, from highest to lowest, the three yields on a bond priced at a premium.

A

Nominal Yield, Current Yield, YTM

51
Q

A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?

A

YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.

52
Q

Define duration.

A

The measure, expressed in years, of a bond’s price sensitivity to interest rate changes

53
Q

What does a normal, positive, ascending, or upward sloping yield curve indicate?

A

Bonds with longer maturities have higher yields than bonds with shorter maturities.

54
Q

The yield curve is ____________ when short-term bonds have higher yields than long-term bonds.

A

The yield curve is inverted (negative/descending) when short-term bond yields are higher than long-term bonds.

55
Q

True or False: A flat yield curve reflects both long and short-term yields being the same.

A

True

56
Q
A
57
Q
A
58
Q
A
59
Q
A
60
Q

What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?

A

98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.

61
Q

What is the formula for calculating a bond’s current yield?

A

Annual Interest

÷

Current Market Price

62
Q
A

STC Cards (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions