Debt: Bond Basics Flashcards
Debt: Bond Basics
BASIC BOND TERMS
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1) have stated rate of interest on the debt? Pay interest when 2)bonds have a standard par value of what? 3) On the stated date, the bond is redeemed by the issuer at what amount? 4) how zero-coupon bonds work 4.1) price-wise are zero-coupon long-duration most volatile?
1) yes, semi-annually
2) $1,000
3) par
4) No semi-annual interest payments = Instead the bonds are purchased at a discount from par and are redeemed at maturity at par value.
4. 1) yes
Debt: Bond Basics
BOND ISSUE STRUCTURE
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-Term Bonds
1) A bond issue where every bond has the same interest rate and maturity is called? 1.1) Also known as
-Serial bonds
2)A bond issue with differing maturities is a 3) differing maturities require what, and why? 4)Most municipal bond issues and corporate equipment trust certificates are
1) Term bond
1. 1)dollar bonds
2) Serial bonds
3) different interest rates, longer maturity = more interest investor requires
4) Serial bonds
Debt: Bond Basics
BOND ISSUE STRUCTURE
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5) What is a “series bond” 5.1) used often? 5.2) who tends to use and why
5)A bond issue where the bonds have the same maturity but different dates of issuance 5.1) no 5.2) finance construction projects, but issuing debt to cover yearly project cost [$x year one, $x year 2 “not needed at once”; vs. on day one for a multi-year project] save on interest paid
Debt: Bond Basics
BOND PRICE QUOTES
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- Corporate Bond Quotes
1) Corporate bonds are generally what type? 2) quoted on a percentage of what? 3) quoted as? 4) For example, ABC Corporation debentures are quoted at 101 3/8, what is the par value 5) A 1 point price movement on a bond equals - U.S. Government Bond Quote
6) Government bonds are generally what type? 7) quoted on a percentage of what? 8)quoted on a percentage of what? 9) U.S. Treasury Bond is quoted at 99.24, what is the par value - Corporate and Government
10) corporate, government and municipal bonds are quotable on a percentage of par basis because they are? 11)reason, why governments are quoted in 32nds whereas corporates are quoted in 1/8th 12) what is “spread”
1) term
2) par basis
3) percentage of $1,000 par in fractions of 1/8ths
4) 101.375% of $1,000 par = $1,013.75
5) .01% of $1,000 par = $10 5.1)
6) term
7) par basis
8) percentage of $1,000 par in fractions of 1/32nds
9) $1,000 par bond is 99 and 24/32% of par = 99 and .75 % = 99.75% of $1,000 par = $997.50.
10) term bonds 11)government trading market is much more active and traders are willing to trade on narrower margins (known as spreads) 12)is the difference between the price at which a dealer would buy the stock, versus the price at which the dealer would sell the stock
Debt: Bond Basics
BOND PRICE QUOTES [continued]
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-Municipal Serial Bonds - Basis Quotes
1) are generally what type 2)quoted on a percentage of what 3)A 6% coupon rate municipal bond is quoted on a 6.50 basis, what does this mean? 3.1) how about A 6% coupon rate municipal bond is quoted on a 5.50 basis
1) serial bonds
2) yield basis or basis quote.
3) the dealer is discounting the price [50 basis points]below par to raise the effective yield to 6.50%.
3. 1_dealer is raising the price above par to lower the effective yield to 5.50%
Debt: Bond Basics BOND PRICE QUOTES [continued] -------------------------------------- -Basis Points 1) 1 basis point movement equals how much change to yield 1.1) how about 100 basis points 2) Basis quotes are in what? 2.1) example A quote of 5.50% is a bond priced to yield of what
- Price At Par
3) When bonds are originally issued, the interest rate placed on the bonds is set at 3.1) if it stays this way after issue what is it called, to trade at what - Price At Discount [higher % basis than par, lower bond price]
4) T/F, If the 5.50% coupon bond were quoted on a 6.00% basis, then the price would be 96.56% [we don’t need to calculate this] of par value of $965.60 for every $1,000 par bond 4.1)will this affect the coupon? 5)T/F In order to increase the yield on the bond, above the stated coupon rate, the dealer had to lower the price below par. - Price At Premium [lower % basis than par, higher bond price]
6) T/F If the 5.50% bond were quoted on a 5.00% basis, then the price would be 103.59% of par value or $1,035.90 for every $1,000 par bond 6.1) T/F In order to decrease the yield on the bond below the stated coupon rate, the dealer had to raise the price above par.
1) .01
1. 1) 1% change in annual yield
2) yield
2. 1) 5.5%
3) current market rate
3. 1) 100% par
4) sold at a discount of
4) true
4. 1) no-coupon at issue will always be the same. 5)T
6) T
6. 1) T
Debt: Bond Basics
BOND PRICE QUOTES [continued]
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-To Find Approximate Price Of Long Term Bond based on a yield basis
1) what is the current yield formula 1.1) what if you don’t have the current market price, what is that formula
2)solve: a municipal bond dealer quotes a 30 year 4% General Obligation bond on a 5.00 basis. The approximate price of this bond is:
3)solve: a municipal bond dealer quotes a 30 year 6% General Obligation bond on a 5.00 basis. The approximate price of this bond is:
1) current yield=annual income/current market price.
1. 1)current market price=annual incom/ yield
2) 4% coupon/ 5% baisis= 80% of $1,000 par=$800
3) 6% coupon/ 5% bais= 120% of $1,000 par= $1,200
4) trading at a discount
5) bond is trading at a premium
Debt: Bond Basics
THE EFFECT OF INTEREST RATE MOVEMENTS ON BOND PRICES
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-Discount vs. premium
4)if the “basis” is higher than the coupon, discount or premium 5)”basis” is lower than the coupon 6)
1) trading at a discount
2) bond is trading at a premium
Debt: Bond Basics
THE EFFECT OF INTEREST RATE MOVEMENTS ON BOND PRICES [Continued]
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1) Bond prices are influenced by?
[Do they rise or fall]
2) As interest rates rise, bond prices?
3) As interest rates rise, bonds that were issued at par value will?
4) As interest rates drop, bond prices?
5) As interest rates drop, bonds that were issued at par value will?
1) interest rate movements
2) drop until the yield on the bond equals the market rate of interest; this is known as “depreciation.”
3) now trade at a discount to par.
4) rise until the yield on the bond equals the market rate of interest; this is known as “appreciation.”
5) trade at a premium to par.
Debt: Bond Basics
THE EFFECT OF INTEREST RATE MOVEMENTS ON BOND PRICES
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-Longer Maturity - Greater Volatility
1)interest rates move, bond prices move by equal amounts? 2) The longer a bond’s maturity, the faster or slower the bond’s price will move in response to an interest rate change 2.1) how about shorter maturity and why 3)The actual current market price of the bond is the “present value” of what
1) no 2) faster, the “present value” of that large principal payment is greatly discounted to today’s value, compounded over many years. Due to this greater compounding effect, the current price of the bond can move greatly as market interest rates move. 2.1) slower, as you get closer to principal repayment price cannot move mush from par ask market interest rates move 3) the stream of future interest payments and the final principal repayment, discounted by the current market rate of interest
Debt: Bond Basics
THE EFFECT OF INTEREST RATE MOVEMENTS ON BOND PRICES
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-Factors Affecting Bond Price Volatility: Coupon
1)The lower the coupon rate on a bond, the greater/ lesser the bond’s price movements in response to changes in market interest rates.
2)The higher the coupon rate on a bond, the greater/ lesser the bond’s price movements in response to changes in market interest rates.
3) a zero-coupon bond. This bond will exhibit the greatest/lesser price volatility.
4)As market interest rates move up, the percentage downward price movement of bonds, ranked from greatest percentage movement to lowest= [Large Discount Bond (lowest coupon); Small Discount Bond; Par Bond; Small Premium Bond; Large Premium Bond (highest coupon)]
1) greater
2) lesser
3) greatest
4) true
Debt: Bond Basics BOND YIELDS ----------------------------------- -Nominal Yield 1) What is it
- Current Yield
2) The formula for the current yield 3)solve: A bond with a 10% nominal yield is trading at 90. The current yield is? 3.1) if your current yield is higher than the nominal yield, is it a discount or premium bond?
1) stated rate of interest on the bond
2) current yield =annual interest in dollars/bonds market price
3) $100 annual incom/$900 market price=11.11%
3. 1) discount, discount price is taken into account in question 3
Debt: Bond Basics BOND YIELDS [continued] ----------------------------------- -Yield To Maturity 1)The yield to maturity adjusts the stated rate of interest to the current market value of the bond, but also factors in what [2]? 2)As bond prices fall, the yield to maturity rises or falls 2.1) if bond prices rise? 3) Will you need to know the formula to calculate YTM
1) -Any capital gain that will result from buying the bond at a discount and subsequently holding the bond to maturity; or
- Any capital loss that will results from buying the bond at premium and subsequently holding the bond to maturity.
2) RIses
2. 1) YTM falls
3) no
Debt: Bond Basics
BOND YIELDS [continued]
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- Yield YMCA or “C” bookends [how to solve higher/lower] The order will be: CY-YTM-YTC [Nominal will come before CY]
1) premium bond, what is higher CY or YTM 1.1) why is this 2) discount bond, what is higher CY or YTM 2.1) Why is this
Overview [know one side and the other is opposit]
Discount= YTC>YTM>CY>Coupon
Premium=YTC
1) CY [or nomiman] 1.1) not only reflects the fact that the bond is being purchased for more than par; but it also reflects the annual loss of the bond premium as a reduction of the investment return 2)YTM 2.1)reflects the fact that the bond is being purchased for less than par; but it also reflects the annual earning of the bond discount as part of the investment return.
Debt: Bond Basics CALL AND PUT FEATURES ----------------------------------- -Calls 1) what is call premium 1.1) how does this work with zero-coupon bonds 2) is it on a bond contract? 3) T?F the issuer has the right to redeem (to "call-in") the bond at a predetermined price at a date prior to maturity. 4) will call premium change over the years? 5) why are they good for companies 6) why not good for investors 7) Issuers call in debt because [3 things] 8)call price tends to set a ceiling on the market price of the bond and why 9)If interest rates rise, callable and non-callable bond prices will rise or fall 10)If interest rates fall, callable bond prices will rise slower than non-callable bonds
- Call Protection
11) does what 12) typical time frame
1) the amount above par value that an issuer will pay the bondholders to redeem the bond prior to the scheduled maturity date 1.1) current accreted value (the purchase price plus compounded growth-to-date) plus a call premium 2) yes 3) True 4) yes, as the years go by, the lower the rate. 5) if interest rates go down, a business can call in high-interest-rate bonds and retire them for new issue lower rate bonds. 6) investor will get money back and have to invest in another option when the market interest rate is lower
7) -Interest rates have dropped [sell new lower rates]
- Mandatory call provisions in the call contract
- The issuer has excess funds that it cannot reinvest profitably,
8) paid more, he would suffer a capital loss when the bond is called 9) fall 10)since it is likely that they will be called
11) prohibits a company from buying back within a specific time frame 12) 10 years
