Debt Securities Flashcards
What are bonds?
Loans that are traded.
Who are the three issuers of bonds?
- Corporations
- Federal government and agencies
- State and municipal governments
Bonds are usually issued in what multiples?
$1000 or $5000
How often is bond interest paid?
Every six months.
In which type of bond do issuers pledge an asset as collateral?
Secured bonds.
Debt instrument not secured by physical assets or collateral. Include T-bills and T-bonds.
Debentures.
How are guaranteed bonds guaranteed?
By a company other than the issuing company.
These bonds pay interest only if earnings will cover it. Only the principal is promised. Riskiest bond.
Income bonds.
These bonds have no interest payments but are issued at a deep discount and bought back at full par value.
Zero coupon bonds.
These bonds have higher yields and are issued at lower prices than investment grade bonds because of the higher risk.
Speculative or junk bonds.
These bonds are issued and traded outside the country in whose currency they are denominated.
Eurobonds.
These bonds are dollar denominated Eurobonds.
Eurodollar bonds.
Short term (often overnight) contracts in which the seller agrees to buy securities back at a specified time and higher price.
Repurchase agreements.
Monies of private lenders held on Federal reserve regional banks and are often lent from one of these to another overnight at the feds fund rate.
Federal funds.
Unsecured notes issued by corporations with a typical maturity of 30 days.
Corporate commercial paper.
Insured, fixed rate time deposits. Good for those who are concerned about principle and want a predictable stream of cash flows.
Negotiable CD’s.
Three methods to retiring corporate bonds
- Call feature
- Refunding
- Sinking fund call
What does it mean to re-fund a corporate bond?
When a company issues a bond in order to pay off a previously existing bond issue.
This is when the issuer deposits money in a fund designated for redeeming outstanding bonds. If sinking fund is mandatory, then certain principle amounts must be redeemed annually on specified dates. If the fund is optional, redemption takes place at the discretion of the issuer.
This is a sinking fund call.
Two characteristics of US Treasury securities.
- May be traded freely
2. Non-interest bearing: they sold at a discount and redeemed at par value
What is the maxiumum purchase for a competitive bid?
$5 M
What does non-competitive bid mean?
Willing to accept whatever rate is determined at the auction.
What does competitive bid mean?
Specifying the rate you will accept at auction.
Bonds issued by a government agency that are not fully guaranteed in the same way that US treasury and municipal bonds are. These are mortgage investments.
Agency bonds
What does STRIP stand for?
separate trading of registered interest and principal securities
Portion of a STRIP that states how much principle is owed.
Corpus
Portion of a STRIP that specifies interest payments.
Coupon
What is a stripped corpus?
A zero coupon bond.
Coupon yield based on bond’s par value.
Nominal yield
Coupon Payment/Market Price
Current yield
[Annual Interest - (Premium/Years to Maturity)]/Average Price of Bond
Yield to Maturity.
For accrued interest, how many days to corporate and municipal bonds use?
360
For accrued interest, how many days to governments use?
365
Call Premium
Issuer pays premium to bondholder for right to call.
Partial Call
Random or lottery selection
How are serial bonds called?
In reverse order of maturities because longer maturities have higher interest rates.
How are term bonds called?
Generally called by random drawing.
Bonds generally have a non-callable period, which is an advantage to bondholders in periods of declining interest.
Call protection
If no call provision, the issuer can buy bonds on the open market.
Tender offer
In return for a lower interest rate, the investor has the right to put (sell) the bond to the issuer for full face value (par).
Put Bonds
Average Price of Bond
(Price paid + Amount Received at Maturity)/2
Difference in yield between short and long term bonds with the same quality.
Yield curve
When long-term interest rates are lower than short term rates. This predicts lower future interest rates, so you should buy long-term.
Inverted Yield Curve
When the difference between short and long term rates is about 300 basis points.
Nominal Yield Curve
