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Series 7 > Debt > Flashcards

Debt Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Bond

A

Debt security that obligates the issuer to pay interest semi-annually and repay the principal amount when the debt matures.

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2
Q

Par Value

A

Amount bonds are issued at. Most are at $1,000

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3
Q

Redemption

A

Issuer pays back interest and principal

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4
Q

Term Bond

A

Bond issue where every bond has the same interest rate and maturity.

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5
Q

Serial Bond

A

A bond issue with differing maturities and different interest rate.

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6
Q

Balloon maturity

A

A large section of bonds maturing at the same time in a serial bond.

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7
Q

Series bond

A

A bond issue where the bonds have the same maturity but different dates of issuance. generally used in construction projects. Total interest cost to issuer reduced this way.

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8
Q

Corporate Bond quoted in

A

A percentage of par in 1/8ths

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9
Q

Government/treasury bond quoted in

A

a percentage of par in 1/32nds

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10
Q

Municipal Bonds quoted in

A

Basis quotes or yields (YTM)

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11
Q

One basis point =

A

.01%

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12
Q

5.50% at 6.00 means

A

A bond with a current yield of 5.50% is quoted at a 6.0% YTM or basis.

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13
Q

Dollar Bonds

A

Term Bonds for corporate, government, or Municipal bonds. Any bond quoted on a percentage of par basis (not on a yield basis).

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14
Q

Price at Discount

A

Amount of interest received is less than current market interest.

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15
Q

Price at Premium

A

Amount of interest received is more than current market interest.

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16
Q

Formula for approximate price of long term bond quoted on a yield basis

A

Coupon rate/basis to get percent of par of the price.

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17
Q

Discount Bond

A

A bond sells at a discount when par value is in excess of the bond’s purchase price.

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18
Q

Premium Bond

A

A bond sells a a premium when the bond’s purchase price is in excess of par value.

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19
Q

PNCYY

A

Price, Nominal Yield, Current Yield, Yield to Maturity, Yield to put or call

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20
Q

Greater volatility

A

Longer maturity, lower coupon, large discount

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21
Q

Lower volatility

A

shorter maturity, higher coupon, small discount

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22
Q

Most volatile bonds

A

Long term zero bond issues

23
Q

Nominal Yield

A

Stated rate of interest on the bond

24
Q

Current Yield formula

A

Annual Interest in Dollars/Bond’s Market Price

25
Q

Yield to Maturity formula

A

(annual income + or - capital gain/loss)/((purchase price + Redemption Price)/2)

26
Q

Call definition

A

An issuer has the right to redeem (call) the bond at a predetermined price at a date prior to maturity.

27
Q

When do calls occur

A

When interest rates drop. The company can call the bonds and re-distribute the bonds at a lower interest rate.

28
Q

Call protection

A

Bonds can’t be called for a certain number of years so investors will buy them and have some protection. Typically 10 years.

29
Q

Does call price set a ceiling or a floor on market price?

A

Ceiling.

30
Q

How are zero coupon bonds callable?

A

At accreted value plus the call premium.d

31
Q

Put definition

A

Gives the investor the right to tender the bond (put the bond) to the issuer after a specified date for a price set in the bond contract.

32
Q

When does an investor exercise a put?

A

When interest rates rise. The bonds become less valuable.

33
Q

Does put price set a ceiling or a floor on market price?

A

Floor.

34
Q

Yield to Call or Put formula

A

(annual income + or - annual capital gain or loss)/((purchase price + call or put price)/2)

35
Q

Credit Risk

A

The risk that the issuer cannot make interest and principal payments on an issue. Ratings agencies only rate bonds for credit risk.

36
Q

Agencies that rate bonds

A

Moody’s, Standard and Poors, Fitch’s

37
Q

Treasury debt rating is

A

always AAA. The government doesn’t default on payment.

38
Q

Standard and Poor Investment Grade

A

AAA, AA, A, BBB, + and -

39
Q

Standard and Poor Speculative Grade (junk)

A

BB, B, CCC, CC, C, + and -

40
Q

Moody’s Investment Grade

A

Aaa, Aa, A, Baa, 1-2-3

41
Q

Moody’s Speculative Grade (junk)

A

Ba, B, Caa, Ca, C, 1-2-3

42
Q

Standard and Poor’s commercial paper ratings

A

P1, P2, P3, NP (only P1 and P2 are traded)

43
Q

Standard and Poor’s Municipal note ratings

A

MIG 1, MIG 2, MIG 3, SG (investment grade MIG1, MIG2)

44
Q

Interest Rate Risk/Market Risk

A

The risk that rising interest rates will cause pond prices to fall. Long term, low coupon, and deep discount bonds are more susceptible to this. Only applies to fixed rate securities.

45
Q

Purchasing Power Risk

A

The risk that inflation will lower the value of bond interest payments and principal repayment, thereby forcing prices to fall. most significant for long term bonds when market interest rates rise.

46
Q

Marketability Risk

A

The risk that the security will be difficult to sell.

47
Q

Liquidity Risk

A

The risk that the security can only be sold by incurring large transaction costs.

48
Q

Legislative Risk

A

The risk that new laws reduce the value of a security.

49
Q

Call Risk

A

The risk that the bonds may be redeemed prior to maturity, forcing reinvestment of the proceeds at lower interest rates.

50
Q

Reinvestment Risk

A

The risk for a long-term bond investor that market interest rates are falling over that investment’s time horizon and the reinvested interest rates will be lower.

51
Q

What security avoids reinvestment risk?

A

Zero coupon bond

52
Q

Exchange Rate Risk

A

The risk that the value of the currency in which the investment is denominated weakens (or the U.S. dollar strengthens).

53
Q

Political Risk

A

Risk of investing in foreign countries that have weak political and legal systems-typically 3rd world countries.

54
Q

Normal Yield Curve

A

Ascending. Typical during periods of economic expansion. Monetary policy is loose.

Series 7 (3 decks)

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