Debt Securities Flashcards
What is a debt security ?
A financial asset that represents an agreement between a lender (buyer of the security) and borrower (issuer of the security)
Name 3 types of debt security
Bond
Note
Money Market
What is maturity ?
The time that the par value or principal is due to be paid
What happens on the maturity date ?
The principal is paid back and the last interest is paid
Name two maturity timeframes
Actual date - where the principal is on a specific date e.g. July 1 2036
Length of time - reference to the time of issuance until maturity e.g. issued in 1998 with maturity date of 2038 is a 30 year bond
What is a bond ?
A long term debt security with a maturity greater than 12 months usually 10 or more years
What is a note ?
A debt security with an intermediate maturity, usually 5-10 years
What is a money market security ?
Short term debt security that always has a maturity date of 12 months or less
What is par value ?
The denomination of a bond, assume a bond’s par value is $1000 unless otherwise stated aka principal
What is a coupon rate ?
The agreed upon rate or interest the issuer will pay the bond holder based on the par value of the bond annually
How often are coupon rates usually paid ?
Semi-annually
What is a premium bond ?
A bond that trades above its par value
What is a discount bond ?
A bond that trades below its par value
Interpret this bond quote: 1M ABC J&J 15 6s M’33
1M = the par value of the bond - $1000 ABC = issuer J&J = the 2 months the interest is paid and are always 6 months apart - January & July 15 = actual date of pay - January 15th & July 15th 6s = coupon rate/interest rate - 6% M’33 = the year when the bond will mature - 2033
What is yield ?
A measurement of how much an investor earns on an annual basis also called rate of return or return
