Debt Securities

Question 1

What is a debt security ?

Answer 1

A financial asset that represents an agreement between a lender (buyer of the security) and borrower (issuer of the security)

Question 2

Name 3 types of debt security

Answer 2

Bond
Note
Money Market

Question 3

What is maturity ?

Answer 3

The time that the par value or principal is due to be paid

Question 4

What happens on the maturity date ?

Answer 4

The principal is paid back and the last interest is paid

Question 5

Name two maturity timeframes

Answer 5

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

Question 6

What is a bond ?

Answer 6

A long term debt security with a maturity greater than 12 months usually 10 or more years

Question 7

What is a note ?

Answer 7

A debt security with an intermediate maturity, usually 5-10 years

Question 8

What is a money market security ?

Answer 8

Short term debt security that always has a maturity date of 12 months or less

Question 9

What is par value ?

Answer 9

The denomination of a bond, assume a bond’s par value is $1000 unless otherwise stated aka principal

Question 10

What is a coupon rate ?

Answer 10

The agreed upon rate or interest the issuer will pay the bond holder based on the par value of the bond annually

Question 11

How often are coupon rates usually paid ?

Answer 11

Semi-annually

Question 12

What is a premium bond ?

Answer 12

A bond that trades above its par value

Question 13

What is a discount bond ?

Answer 13

A bond that trades below its par value

Question 14

Interpret this bond quote: 1M ABC J&J 15 6s M’33

Answer 14

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

Question 15

What is yield ?

Answer 15

A measurement of how much an investor earns on an annual basis also called rate of return or return

Question 16

What is Nominal Yield ?

Answer 16

The amount of annual interest an investor receives from a bond at par value

Question 17

What is the formula for Nominal Yield ?

Answer 17

NY=annual interest rate/par value

Question 18

What is Current Yield ?

Answer 18

A comparison between the annual interest received to the cost of purchasing the bond

Question 19

What is The formula for Current Yield ?

Answer 19

CY=annual interest rate/market price

Question 20

What is Yield To Maturity ?

Answer 20

The earnings of a bond held to maturity

Question 21

What is Yield To Call ?

Answer 21

The amount earned when an investor holds a bond until the next call date

Question 22

What is Premium Price ?

Answer 22

When a bond’s interest rate is higher than interest rates on other comparable bonds

Question 23

What is Discount Price ?

Answer 23

When a bond’s interest rate is lower than interest rates on other comparable bonds

Question 24

At what fraction are Corporate bonds quoted?

Answer 24

Corporate bonds are quoted in 8ths

Question 25

At what fraction are government bonds quoted?

Answer 25

Government bonds are quoted in 32nds

Question 26

How many dollars are each bond point worth?

Answer 26

$10

Question 27

What is the price of a corporate bond quoted at 102 1/4?

Answer 27

102 + 1/4=102.25

102.25x10=$1022.50

Question 28

What is the price of a government bond quoted at 101-16?

Answer 28

101-16=101 16/32
101 16/32= 101.5
101.5x10=$1015.00