Debt Securities - Corp and U.S. Flashcards
Maturity
Bond holder receives par value plus any interest due.
Bond Prices
Bond prices are quoted as a percentage of par value, most often without the percent sign. A bond trading at 100 is trading at 100 percent of $1,000 par.
Corporate Bond Quoted
Corporate bonds are usually quoted in increments of ⅛ percent (⅛% = 0.00125 or $1.25), so a corporate bond quoted at 99⅜ (99.375 percent) would be trading at $993.75.
Coupon Rate
tells the investors how much annual interest they’ll receive.
Assume bonds pay interest semi-annually
Bond Indenture
The indenture (also known as deed of trust or resolution) is the legal agreement between the issuer and its bondholders, and is printed on or attached to the bond certificate.
All indentures contain basic terms: The maturity date
The par value
The coupon rate (interest rate) and interest payment dates
Any collateral securing the bond
Any callable or convertible features (check out
Trustee
A trustee is an organization that administers a bond issue for an institution; it ensures that the bond issuer meets all the terms and conditions associated with the borrowing.
Term Bonds
are all issued at the same time and have the same maturity date.
Sinking Fund
A corporation creates a sinking fund when it sets aside money over time in order to retire its debt. Investors like to see that a sinking fund is in place
Series Bonds
These bonds are issued in successive years but have only one maturity date. Issuers of series bonds pay interest only on the bonds that they’ve issued so far.
Construction companies
Serial Bonds
In this type of bond issue, a portion of the outstanding bonds matures at regular intervals. (Perhaps 10 percent of the entire issue matures yearly.) Serial bonds are usually issued by corporations and municipalities to fund projects that provide regular income stream.
Balloon Issue
A serial bond that has more bonds maturing on the final maturity date is called a balloon issue.
Mortgage Bonds
These bonds are backed by property that the issuer owns.
open-end mortgage bond, the issuer may borrow more money by using the same property as collateral. With a closed-end mortgage bond, the issuer can’t borrow more money by using the same property as collateral
Equipment Trusts
These bonds are issued mainly by transportation companies and is backed by equipment they own
Collateral Trusts
These bonds are backed by financial assets (stocks and bonds) that the issuer owns. A trustee (a financial institution the issuer hires) holds the assets and would sell them to pay off the bonds in the event of default.
Guaranteed Bonds
Guaranteed bonds are backed by a firm other than the original issuer, often a parent company. If the issuer defaults, the guarantor pays off the bonds. As such, the rating of the bonds is tied to the rating of the guarantor
Debentures
These bonds are backed only by the issuer’s good word and written agreement (the indenture) stating that the issuer will pay the investor interest when due (usually, semiannually) and par value at maturity.
Income (adjusted) Bonds
These bonds are the riskiest of all. The issuer promises to pay par value back at maturity and will make interest payments only if earnings are high enough. Companies in the process of reorganization usually issue these bonds at a deep discount.
Nominal Yield
Coupon rate on the face of the bond.
Current Yield
(CY) is the annual rate of return on a security. The CY of a bond changes when the market price changes. You can determine the CY by dividing the annual interest by the market price:
Yield to Maturity (YTM)
The yield to maturity (YTM) is the yield an investor can expect if holding the bond until maturity. The YTM takes into account not only the market price, but also par value, the coupon rate, and the amount of time until maturity.
Yield to Worst
To determine the yield to worst (YTW), you have to calculate the yield to maturity and YTC for all the call dates (if there’s more than one) and choose the lowest. If you get a question on YTW, knowing the definition should be enough to get you by
Yield to Call
The yield to call (YTC) is the amount that the investor receives if the bond is called prior to maturity.
Total Return
The total return calculates the full return on a particular investment over a given period of time.
Determine the initial cost of the investment. Calculate the total amount of interest or dividends received over the time of investment. Add the interest or dividends to the selling price. Divide that number by the initial cost of the investment, and subtract
Investment Grade
The top four ratings are considered to be investment grade (AAA, AA, A, and BBB for S&P; Aaa, Aa, A, and Baa for Moody’s), and the letter ratings below that are considered to be junk bonds or high-yield bonds.
Callable Bonds
A callable bond is a bond that the issuer has the right to buy back from investors at the price stated on the indenture (deed of trust).
Call Protection
protection is the amount of time (usually, several years) that an issuer has to wait before calling its bonds (such as five years after issuance).
Call Premium
which is an amount over par value that an issuer has to pay if it calls its bonds in the year(s) immediately following the expiration of the call protection.
Make Whole Call Provision
it allows the issuer to call the bonds provided that the issuer makes a lump-sum payment to investors that includes not only payment for the bond, but also the present value of any future interest payments investors will miss because of the call.
Step Coupon Bonds
or step-up coupon securities, step coupon bonds typically start at a low coupon rate, but the coupon rate increases at predetermined intervals, such as every five years. The issuer typically has the right to call the bonds at par value at the time the coupon rate is due to increase.
Put Bonds
are better for investors. Put bonds allow the investor to “put” the bonds back (redeem them) to the issuer at any time at the price stated on the indenture.
Convertible Bonds
Able to convert to common stock. Parity occurs when a convertible bond and its underlying stock (the stock it’s convertible into) are trading equally
Conversion Ratio
Par Value / Conversion Price
Government Securities Risks
interest risk, reinvestment risk, purchasing power risk, and so on
Treasury Bills
4, 8, 13, 26, 52. Short term
Issued at discount and mature at Par. This is the interest rate the difference between purchase and par.
Treasury Notes
2,3,5 & 7 years. Considered intermediate. Interest payments every 6 months.
Treasury Bonds
30 Years. Considered long term. Pays interest rates every 6 months.
T-STRIPS
Separate Trading of Registered and Principal Securities.
6 Months to 3 Years
Sold at Discount, mature at Par.
TIPS
Treasury Inflation Protected Securities. Tied to CPI
5,10 & 30 years
Pay interest every 6 months. Par value and interest payments adjust according to inflation or deflation.
Agency Bonds
Agency bonds are ones issued by a U.S. government-sponsored agency or government-sponsored entities(GSE).
The bonds are backed by the U.S. government, but not all are guaranteed by the full faith and credit of the U.S. government except for Government National Mortgage Association (GNMA)
GNMA (Government National Mortgage Association, or Ginnie Mae)
the only agency securities backed by the full faith and credit of the U.S. government. GNMAs support the U.S. Department of Housing and Urban Development (HUD).
FNMA (Federal National Mortgage Association, or Fannie Mae)
FNMA is a publicly held corporation that is responsible for providing capital for certain mortgages.
FNMA is privately owned and publicly held but is still a GSE.
FHLMC (Federal Home Loan Mortgage Corporation, or Freddie Mac)
designed to create a secondary market for mortgages. Freddie Mac purchases residential mortgages from financial institutions and packages them into mortgage-backed securities that are sold to investors.
FCS (Farm Credit System)
The FCS consists of lending institutions that provide financing and credit to farmers. It’s a GSE but is privately owned.
SLMA (Student Loan Marketing Association or Sallie Mae)
SLMA isn’t involved in providing mortgages but provides a secondary market for student loans. As such, SLMA purchases student loans and repackages them as short- and medium-term debt securities for sale to investors.
Money Market Instruments
relatively safe short-term loans that can be issued by corporations, banks, the U.S. government, and municipalities. Most of these instruments have maturities of one year or less; they’re usually issued at a discount and mature at par value.
Repurchase Agreements
Repurchase agreements (repos) are a contract between a buyer and a seller. The seller of the securities (usually, T-bills) agrees to buy them back at a previously determined price and time. Repos are short-term loans.
Federal Funds
Federal funds are loans between banks to help meet reserve requirements. Federal funds are usually overnight loans for which the rates change constantly depending on supply and demand.
Commercial Paper
Commercial paper is unsecured short-term corporate debt. Commercial paper is issued at a discount and matures at par value. Commercial paper is issued with an initial maturity of 270 days or less and is exempt from SEC registration.
Brokered CD’s
originate from a bank and are outsourced to broker–dealers to sell to investors. Unlike typical CDs, which are purchased directly from a bank, brokered CDs can be traded in the market. Negotiable CDs that require a minimum investment of $100,000 are often called jumbo CDs.
Eurodollars
Eurodollars are American dollars held by a foreign bank outside the United States. This situation is usually the result of payments made to overseas companies.