Debt Securities Flashcards
Which bond is most likely to be called?
A
A 6% bond in a 7% market
B
A 7% bond in an 8% market
C
A 7% bond in a 7% market
D
A 6% bond in a 5% market
D
A 6% bond in a 5% market
An issuer will likely call in bonds prior to maturity if they were issued with a call feature and the new bonds at lower interest rates can replace old bonds with higher interest rates. Bonds are called when interest rates have fallen. Bonds with coupons higher than market rates are most likely to be called in early.
What is a corporate bond that has no specific collateral backing but is guaranteed by the full faith and credit of the issuing corporation?
A
Income bond
B
Guarantee bond
C
Equipment trust certificate
D
Debenture
D
Debenture
Equipment trust certificates are collateralized using the equipment of the issuer. Guarantee bonds are backed by the full faith and credit of 2 entities. An income bond is a result of a debt renegotiation or bankruptcy. A debenture is backed only by the issuer’s ability to pay principal and interest.
Which of the following statements concerning zero-coupon corporate bonds is correct?
A
There is no tax liability until the bond reaches maturity
B
Long-term zero-coupon corporate bonds have a high level of volatility
C
Zero-coupon corporate bonds are not subject to interest-rate risk or reinvestment risk
D
Zero-coupon corporate bonds are not affected by changes in interest rates
B
Long-term zero-coupon corporate bonds have a high level of volatility
Zero-coupon bonds do not pay periodic interest but, instead, pay all interest to the investor at the bond’s maturity. In effect, the interest being earned by the investor is reinvested and compounded at a set rate until maturity. Such bonds have no reinvestment risk because the owner is not receiving periodic interest that must be reinvested at current rates. However, the fact that zero-coupon bonds are sold at a discount from par value makes their prices very sensitive to changes in interest rates (interest-rate risk). The more deeply discounted a bond, the more volatile it will be. The most volatile bonds are deep discount long-term bonds and zero-coupon bonds.
What is the dollar price of a $1,000 par value corporate bond trading for 84.25?
A
$84.25
B
$8,425.00
C
$842.50
D
$841.40
C
$842.50
Bonds are quoted in points and decimals. For corporate and municipal bonds, 1 point equals $10. A bond quoted at 84.25 (points) x $10 = $842.50. Corporate bonds may also be quoted in 1/8th of a point. U.S. government bonds are quoted in points and in 32nds of a point. A period is used to separate full points to the left from 32nds of a point on the right side of the period.
These are issued ahead of an expected long-term municipal bond issue:
A
Bond anticipation notes (BANs)
B
Revenue anticipation notes (RANs)
C
Tax anticipation notes (TANs)
D
Tax and revenue anticipation notes (TRANs)
A
Bond anticipation notes (BANs)
Municipal notes are short-term debt obligations. They have maturities ranging from 3 months to 3 years. They sell at a discount to par and pay principal at maturity. They are called anticipation notes since their issuance is dependent upon some anticipated stream of revenue expected in the near future. There are several common anticipation notes. Their names explain the anticipated revenue. Here are a few examples: Tax anticipation notes (TANs) – these are issued with the expectation of future tax revenues. Revenue anticipation notes (RANs) – these are used in anticipation of actual revenue from an enterprise. Tax and revenue anticipation notes (TRANs) – a combination of expected future taxes and revenues. Bond anticipation notes (BANs) – used ahead of an expected long-term bond issue.
What type of investment is an asset-backed security?
A
Option
B
Equity income
C
Capital appreciation
D
Fixed income
D
Fixed income
Asset-backed securities (ABS) are a form of pooled, fixed-income investment. They were created to take advantage of the higher interest rates of other types of debt. Asset-backed securities (ABS) are created by buying and bundling loans – such as residential mortgage loans, commercial loans, or student loans – and creating securities backed by those assets, which are then sold to investors. Often, a bundle of loans is divided into separate securities with different levels of risk and returns. Payments on the loans are distributed to the holders of the lower-risk, lower-interest securities first, and then to the holders of the higher-risk securities.
Corporate bonds pay interest on a semiannual basis to bondholders. The interest received is:
A
Subject to capital gains tax in the year received
B
Taxable when the bond matures
C
Subject to ordinary income tax in the year received
D
Not subject to taxation
C
Subject to ordinary income tax in the year received
Corporate bonds often offer attractive coupons, but investors must realize that the coupon (interest) on the bond is subject to taxation, at ordinary income rates, in the year earned.
Which of the following would traditionally be considered the riskiest investment?
A
General obligation bonds issued by a state
B
General obligation bonds issued by a city
C
Revenue bonds issued by a state
D
U.S. Treasury bills
C
Revenue bonds issued by a state
The revenue bonds are traditionally the riskiest since they are covered only by the revenue from the project and not by the taxing or borrowing power of a governing unit.
Which of the following bonds is not subject to reinvestment risk?
A
A 6% coupon bond purchased at par
B
A zero-coupon bond purchased at a discount
C
A 3% coupon bond purchased at a discount
D
A 9% coupon bond purchased at a premium
B
A zero-coupon bond purchased at a discount
Since they do not pay semiannual interest, zero-coupon bonds have no reinvestment risk. They always trade at a discount (never a premium) because the difference between purchase price and par at maturity is the investor’s interest.
Treasury receipts were created and issued by broker-dealers. These receipts are backed by the interest and principal of what type of Treasury securities?
A
Treasury bills
B
Treasury notes
C
T-STRIPS
D
Series EE bonds
B
Treasury notes
A treasury receipt is a zero-coupon security, similar to a Treasury STRIPS, which was created and issued by broker-dealers. These receipts are backed by the interest and principal of Treasury securities (T-notes or T-bonds), owned by the broker-dealer, and held in escrow.
What is the face value of corporate bonds?
A
$500
B
$5,000
C
$100
D
$1,000
D
$1,00
Corporate, U.S. government, and municipal bonds have a par value, or face value, of $1,000. At maturity, the borrower will repay the face value plus the final interest payment to bondholders.
The bondholder of a corporate bond issue is the:
A
Guarantor
B
Fiduciary acting on behalf of the bondholders
C
Borrower of the bond proceeds
D
Lender of the bond proceeds
D
Lender of the bond proceeds
The bondholder is the lender. The issuer borrows money for a specified time period at a fixed rate from the investors.
If a bond is purchased at par, which of the following is true?
A
Yield to maturity is greater than the current yield
B
Yield to maturity is equal to the nominal yield
C
Yield to maturity is greater than the nominal yield
D
Yield to maturity is less than the current yield
B
Yield to maturity is equal to the nominal yield
When a bond is purchased at its par value, the nominal yield, current yield, and yield to maturity are all the same. There is no premium or discount to consider in the computation of the yield.
ABC Inc. has 7% convertible debentures outstanding, offered at 96. What term is used to describe this bond?
A
A high-quality bond
B
A discount bond
C
A par bond
D
A premium bond
B
A discount bond
Any bond that has a price less than 100 (par) is termed a discount bond. A bond trading in the market at 96 is trading at 96% of par value. 96% x $1,000 = $960.
Which of the following could not be the collateral behind a secured bond?
A
Real estate
B
Railroad cars
C
The creditworthiness of the corporation
D
Stock of a subsidiary, held in trust
C
The creditworthiness of the corporation
With secured debt, something other than the creditworthiness of the corporation is offered as collateral for the debt obligation.
