Debt Securities Flashcards
In addition to selling stock, corporations may issue what in order to raise capital?
Debt
Debt securities come in what forms?
They come in bonds, notes, certificates, and various market making instruments .
What is one characteristic that is true for all debt securities?
The issuer owes interest and principal to the owner of the debt( the investor)
Trade in the market like all equites.
Debt securities
What are bond issuers
Corporations, the federal government and municipal governments.
Also called principal or Face value.
Par value. Most debt securities have a par of $1000 unless otherwise specified.
The amount paid to investors as principle at maturity.
Par value.
What are some common maturity dates for Maturities?
Common maturities are in the range of 5 to 30 years. Some can be more shorter and others longer.
What is a bond structure so that the principal of the whole issue matures at once?
Term bond
What type of bond schedules portions of the principal to mature at intervals over a period of years until the entire balance has been paid?
Serial bond
What type of bond has a maturity using elements of both serial and term maturities? In this instance the issuer pays part of the principal before the final maturity date, but pays off the majority off the portion before the final maturity date.
Ballon bond.
Types of savings bonds.
Series bonds
A type of debt issued by the federal government that may be purchased and redeemed at banks or from the treasury department.
Savings bond. They do not trade in the secondary market although they are securities. They are also exempt from many several securities laws
Though there is a series bond series…
Is not a type of maturity used with debt maturities
A coupon rate is also known as?
Nominal yield, stated yield, face value.
What is the interest rate the bond issuer has agreed to pay the investor?
A) The Coupon Rate
B) The Nominal yield
C) Stated Yield
D) All of these
E) none of these
D
How is the stated yield calculated?
It is calculated from the bonds par value( face value), and usually stated as a percentage of par.
What will the bond price be if the interest rate was at 6%?
( 6% x $1000 par value= $60)
What happens if bonds trades in between coupon payments?
The new owner gets paid the full coupon from the issue on the next pay cycle. Also known as accrued interest.
Corporate and municipal trades use what month year model to calculate for accursed interest?
30-day. 360 month.
Which transactions employ the actual number of days elapsed when calculating the accrued interest due?
Treasury bonds and treasury notes.
When a buyer owns a zero coupon bond which of the following is true?
A) They incurred interest based on a annual interest base
B) they are not interest bearing
A
Please note interest for coupons and accrued interest are generally paid?
On a semi annual basis. For example A 6% coupon bond pays $60 per year and $30 every 6 months .
Bonds pricing are measured in …
Points
Once upon is trading in the secondary market, make a trade at a price of par, a premium to par or …..
A discount to par.
Example:
If par equals $1000 and is selling at $1200. Is the bond selling at par, premium to par, or at a discount to par.
Premium to par
Example: A bond trading at $800 if the par is $1000 is selling at ?
A discount
Example:
A bond trading at 900 is worth?
A) $9
B) 9%
C) Cannot be determined with the information provided.
D)$900
D. Bond pricing is measured in points with each point equaling to 1% of face value.
Example a bond trading at 103 is equal to?
$1030. Multiply quoted price10 to get dollar amount.
Bonds have a particular sensitivity to ?
Market changes in the interest rate. Bond prices fall as interest rates in the market fluctuate
True or False. The investor pays the issuer an interest rate for the cost of borrowing money.
False. The issuer.
If Interest rates go up ,bond prices for those trading in the secondary market will?
Go down
Conversely if interest rates are going down bond prices trading in the secondary market will…
Go up.
Though bond prices will react to market forces the coupon rate will?
Always stay the same. The coupon rate is a fixed percentage of par value.
What expresses the cash interest payments in relation to the bonds value?
The bonds yield.
This is determined by the the issuer’s credit quality, prevailing interests rates, time to maturity and any features a bond may have
Yield
True or false. A bond can be traded at other prices other than par.
True. The price discount or premium par is taken into consideration when calculating overall yield.
Coupon or stated yield that is set at the time of issue is also called.
Nominal yield.
What measures a bonds animal coupon payment (interest) relative to its market price?
Current yield or (CY).
What is the equation for (CY)?
Annual coupon payment/market price = current yield ( CY)
This reflects the annualized return of the bond of held to maturity.
Yield to Maturity (YTM) . The bond holder takes into account the difference between the price that was paid for the bond and par value when the bond matures.
If a bond is purchased at a discount the investor makes money at maturity. This increases or decreases the return?
The discount increases the return.
If a bond is purchased at a premium the investor loses money at maturity. Does this increase or decrease the amount of the return?
Decreases.
Basis of us also used to define
Yield to maturity. The yield of provided will be the YTM.
Yields are measured in what?
Basis points. This is a measurement of yield equaling to 1/100 of 1%.
What are points:
A measurement of the change in a bonds price which 1% of face value or $10 per bond.
What is a bonds basis?
Also called Yield to Maturity or YTM. Example a bond trading at 5.83 basis means the bond has a YTM of 5.83% ( 5.83 x 100).
Example: If a bond purchased for $900 ( A discount) and is held to maturity, at maturity the investor will receive par $1000. Conversely,If the bond is purchased at $1100 par ( a premium). This premium paid…
Reduces the amount of the return.
What is being described in the following diagram?
The inverse relationship between price and yields. ( Hint: memorize this chart.
Allows an issuer to call in a bond before maturity.
Call feature.
An investor can put the bond back to the issuer before it matures.
Put feature.
Issued by corporate issuers allowing the investor to exchange debt for one’s that give’s ownership rights like common stock.
Convertible feature
Parity is
When the value of a convertible bond equals the value of shares are equal to the value of shares and the conversion feature were exercised.
Bonds that benefit the issuer
Call feature.The issuer generally needs to pay a slightly higher coupon rate.
When bonds are issued with features that benefit the bond holder:
A put feature. The issuer would pay slightly lower coupon rate of interest because the fear will compensate for the lower return
Issuers debt obligations that do not pay regular interest payments.
Zero coupon bonds. The difference between the discounted purchase price, and the full face value at maturity is the return, or accreted interest, the investor receives.