debt securities Flashcards
what is the bond yield order?
- nominal (coupon) yield
- current yield
- yield to maturity
- yield to call
interest on debt securities is paid how often?
semi annually
one point =
$10
100 basis points =
1%
if interest rates go up, price go..
down
if interest rates go down, prices go..
up
coupon yield formula:
Ex. Bond pays $60 annual interest, what is the coupon yield?
annual interest / par value
$60 / $1,000 = 6% coupon yield
current yield formula:
Ex. Bond trading at $1,200 pays $60 annual interest, what is the current yield?
annual interest / current market value
$60 / $1,200 = 5% current yield
basis / yield refers to =
yield to maturity
describe a price bond quote
1 bond point = 1% of par = 10$
describe a yield bond quote
1 basis point = .01 of yield
calculate price:
bond trading @ 92
92 = 92% of par = .92(1,000) = $920
calculate yield:
bond trading to yield 3.70
.01(3.70) = .037, 3.7%
4% on a 4.50 basis (discount or premium?)
discount
7% on a 4.50 basis (discount or premium?)
premium
definition of a callable bond
bond issued that issuer can buy back as of a specified date prior to maturity at a specified price
issuer will call bonds when..
issuer expects current interest rates to fall
callable bonds allows issuer to..
lower their cost of borrowing
callable bonds are advantages to the…
issuer
describe the effects of callable bonds on investors
- usually higher yields
- reinvestment risk (investor has lower rate to reinvest money when bonds are called)
- limits appreciation
describe term maturity of a bond
entire issues mature on same date
describe serial maturity of a bond
issue matures over a period of years
describe balloon maturity of a bond
small repayments initially and larger repayment at maturity
investors buy bonds looking for..
steady streams of income
describe convertible bonds
bonds that the investor can convert into common shares of stock
calculate conversion ratio:
bond convertible @ $40
par / conversion price
$1,000 / $40 = 25 share conversion ratio
calculate parity price of common:
bond trading @ $1,100
conversion ratio = 25 shares
market price of bond / conversion ratio
$1,100 / 25 shares = $44 parity price of common
calculate parity price of bond:
bond has 25 share conversion ratio
common trading @ $44
conversion ratio x common stock price
25 shares x $44 = $1,100 bond parity price
corporate and municipal bonds calculate accrued interest based on..
- 30 day months / 360 day year
- regular way settlement (t+3)
- count up to but do not include settlement date
government securities calculate accrued interest based on..
- actual day months (365 day year)
- regular way settlement (t+1)
- count up to but do not include settlement date
what kind of bonds trade flat?
- zero coupon bonds
- bonds in default
- income bonds (adjustment bonds)
describe volatility in regards to long-term and short-term bonds given a change in interest rate
long term bond prices are more volatile than short term bond prices, given a change in interest rate
describe a normal yield curve
the longer the time of the bond, the higher the yield
-slopes up
describe an inverted yield curve
the longer the time of the bond, the lower the yield
-slopes down
when is a yield curve inverted?
when money is tight and interest rates are high
describe eurodollar deposits
- us dollars invested in banks outside of US
- usually higher risk/yield
describe eurobonds
- issued outside of us and not in us dollars
- issued in bearer form
- currency risk for us investors
descrive eurodollar bonds
- any issuer except the us govt, payable in us dollars
- issued in bearer form
- no currency risk
2 types of corporate debt securities
- secured
- unsecured
what are the different types of secured bonds?
- mortgage bonds
- collateral trust bonds
- equipment trust certificate
what are the different types of unsecured bonds?
- debentures
- subordinated debentures
- guaranteed bonds
- income (adjustment) bonds
describe mortgage bonds
bonds backed by real estate
describe collateral trust bonds
backed by other securities the issuer owns
describe equipment trust certificates
backed by equipment used in the issuers business
describe debentures
backed by issuer full faith and credit
describe subordinated debentures
paid last of all debt if issuer defaults
describe guaranteed bonds
bond guaranteed by a third party (parent company)
describe income bonds
bonds that only pays interest if company is profitable
what is the liquidation priority
- wages
- taxes
- secured bonds
- debentures and general creditors
- subordinated debentures
- preferred stock
- common stock
describe a sinking fund
corporation issues bond and money is put into trust in a bank to cover debt.
-automatically guarantees a AAA rating
what are sinking funds used for?
- redeem bonds at maturity
- call bonds
- tender offers (offer to buy back bond from investor)
what are the advantages of convertible bonds to issuer?
- marketability
- can sell at lower interest rate
what are the advantages of convertible bonds to investor?
- safety of debt
- appreciation potential
what are the negotiable us govt and agency securities
- t-bills
- notes and bonds
- zero coupon bonds
t-bills are quoted as a..
discount from par
how long is a t-bill maturity?
one year or less (4,13,26,52)
how are t-bills sold?
weekly auctions
calculate t-bill price:
t-bill quoted @ 1.3%
par - discount
100% - 1.3% = 98.7% or $987
how long is a t-note maturity?
2-10 years
t-notes and t-bonds are quoted as a..
percentage of par in 32nds
how long is a govt t-bond maturity?
more than 10 years
which is callable? t-bills, t-notes, t-bonds
t-bonds
calculate t-note or t-bond price:
t-note quoted @ 94.08
94% of par + 8/32nds
$940 + 1/4 point ($2.50) = $942.50
treasury receipts issued by?
-issued by broker dealers
treasury strips issued by?
-us treasury
EE and HH are?
savings bonds
describe TIPS
treasury inflation protection security
-savings bond with adjusted principal based on inflation
CMOs are sold by?
banks (financial institutions)
CMOs are backed by?
pool of mortgage securities associated with refinancing risk
how are CMOs paid and taxed?
- pay monthly checks (pass through certificates)
- taxed on all levels
describe the 3 types of CMO tranches
PAC-5 year maturities
TAC-10 year maturities
Z-tranche-more than 10 years
all tranches have what kind of risks?
- prepayment
- extension
buyer has to sign a ___ in order to purchase a CMO?
suitability statement (because they are so risky)
what defines money market securities?
- high quality debt
- one year or less maturity
- highly liquid
describe corporate-commercial paper
- unsecured
- 270 day max maturity
describe banker’s acceptances (BAs)
- facilitate foreign trade
- backed by letter of credit
- issued at a discount
- 270 max maturity
describe federal farm credit systems
- provide agricultural financing
- backed by issuers
- interest exempt from state and local taxes
GNMA is backed by?
full faith and credit of US govt
how are investors of GNMAs paid?
monthly check that includes both principal and interest
FNMAs and FHLMCs are backed by?
issuing agencies
GNMAs are taxed on..
all levels
FNMAs and FHLMCs are taxed on..
all levels
GNMA, FNMA, and FHLMCs all have what kinds of risk?
- prepayment
- reinvestment
when do FNMAs and FHLMCs pay interest?
semi-annually
describe CDOs
pool of non-mortgage backed securities
-can be backed by bonds, auto loans, leases, credit card debt, etc.
describe the federal fund interest rate
the rate federal member banks charge each other for overnight loans
describe the prime interest rate
the rate large us money center banks charge their best corporate customers
describe the discount interest rate
the rate charged by the federal reserve board for loans to depository institutions
describe the broker call loan interest rate
the rate banks charge broker/dealers for funds borrowed to lend to margin account customers
describe interest rates on debt securities from lowest to highest
- federal fund rate
- discount rate
- broker call loan rate
- prime rate
the most marketable bonds have..
- short term maturities
- high credit ratings
