Chpt 2 Debt Flashcards
What are 3 types of bond maturity structures?
Term Maturity “Term Bond”: principal of the whole issue matures at once.
Serial Maturity “Serial Bond Issue”: portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.
Balloon Maturity: Issuer repays part of the principal before maturity but, pays off the major portion of the bond at maturity
What form must a bond be in for an investor to receive interest and principal payments by mail?
Bonds must be fully registered or in book-entry form.
If one point equals $10 (i.e. $1000 x 1%), one basis point equals?
1000 x .0001 = $0.10
Rating services like Standard & Poor’s (S&P) and Moody’s, evaluate the credit quality of which type of bonds?
corporate and municipal bonds
What valuations does Standard & Poor’s (S&P) and Moody’s use for their ratings?
S&P; bond either falls within top (+) or bottom (-) of a category (i.e. AA+ or A-)
Moody’s; numerical qualifiers to their categories (i.e. Aa1 or Baa2) - lower the number the higher the rating within the category.
Below which S&P and Moody rating would a bond be considered speculative?
BBB / Baa
What is the safest type of debt security?
US Government Securities (i.e. Treasury bills, notes, bonds, and saving bonds)
What is the riskiest type of debt security?
Corporate Debt Security
Liquidity is interchangeable with what other term?
Marketability
Do highly rate issuers establish sinking funds?
No, lower rated issuers do to make their issues more marketable.
When do issuers call bonds?
Calls occur when interest rates are declining.
Investors who purchase callable bonds face what types of investment risk?
Call risk; risk that bonds will be called and the investor will lose the stream of income from the bond. Reinvestment risk; if interest rates are down when the call takes place, what likelihood does the investor have of investing the principal received at a comparable rate?
How much interest does a bond receive once called?
bonds do not pay interest after they have been called
Define Refunding Bonds.
Raising money to call a bond – issuer sells a new bond to generate funds to retire an existing bond approaching maturity.
When does pre-refunding occur? What does it lock in?
When there is a call protection. The issuer cannot legally call the bonds until a future date, but if interest rates are low, a low rate can be locked in by issuing the new bonds in advance of the call date.
Are prefunded bonds risky?
No, they cannot get any safer (AAA).
Funds from a pre-funded bond is escrowed into what type of security?
Government securities
Putable bonds are commonly found in what type of bond?
Municipal bonds
Once putable, what type of risk if the investor protected against?
market risk (interest rate risk) as the bonds, at that point, will not trade much below the put price, which is par.
What equation is used to find Current Yield (CY)?
Current Yield = annual interest / Market price
Describe the relationship between Coupon Yield and Current Yield during premium, par, and discount.
When bonds are at par; coupon and CY are equal. When bonds are at premium; CY < Coupon. When bonds are at discount; CY > coupon
Answer the following:
If a bond has a YTC < CY, it is trading at
If a bond has YTM and CY that are equal, bond is trading at
If a bond has a YTM < YTC, it is trading at
If a bond has YTM > coupon, it is trading at
Premium
Par
Discount
Discount
Rank yields from highest to lowest for Premium.
Nominal
CY
YTM
YTC
Rank yields from highest to lowest for Discount.
YTC
YTM
CY
Nominal
