Equity & Fixed Income Flashcards
Frequency of interest payments to bondholders
Semiannual
Equivalent of 100 basis points
1%
Relationship between bond prices and bond yields
Inverse
A bond that is priced below par
Discount
An unsecured corporate bond
Debenture
Most senior form of corporate bond
Secured
Security with the most junior claim in a corporate liquidation
Common stock
Agency debt that is backed in full by the U.S. government
Ginnie Mae
Considered the safest form of debt issued in the U.S.
U.S. Government bonds and notes
Taxable at the federal level; may be exempt from taxation at the state level
U.S. Government bonds and notes
Of YTC, YTM and CY, the yield that is highest when a bond is trading at a premium and is callable
Nominal Yield
Of YTM, YTC and CY, the yield that is highest when a bond is trading at a discount and is callable
Yield to call (YTC)
Of YTM, YTC and CY, the yield that is lowest when a bond is trading at a discount
Nominal Yield
Of YTM, YTC and CY, the yield that is lowest when a bond is trading at a premium and is callable
Yield to call (YTC)
Amount a bondholder receives at maturity of an ABC 9% bond
$1045 (par + 1 semiannual interest payment)
Amount of interest paid every 6 months on 5 XYZ 6% bonds
$150 ($30 semiannual interest per bond)
Securities that are not represented by a physical certificate
Book Entry securities
Interest payment varies based on performance of an index
Variable rate or adjustable rate bonds
Fixed rate equity security that responds to market conditions like a bond
Preferred stock
The date in the future at which a bondholder receives principal
Maturity
Of long-term and short-term bonds, which generally pays a higher interest amount?
Long-term bonds
Of long-term and short-term bonds, which generally has lower price volatility?
Short-term bonds
The degree of risk associated with an issuer’s ability to repay the principal
Credit or default risk
A bond that is rated BBB- or above by Standard and Poor’s
Investment Grade
A bond that may be redeemed by the issuer prior to its maturity date
Callable bond
Risk that a bond may be called prior to maturity
Call risk
The process of calling bonds when interest rates have fallen
Refunding
Issuer funds set aside in advance of a call
Sinking fund
Allows the issuer to call bonds before maturity if certain specified events occur
Catastrophe clause
Specific time period from date of issue when a bond cannot be called
Call Protection Period
Type of bond issue that is not typically callable
U.S. Government bonds (Treasury bonds)
Risk that proceeds from a called bond cannot be invested as favorably
Reinvestment risk
Annual interest divided by current market price
Current Yield (CY)
Environment in which longer-term bonds have higher yields than short-term securities
Normal yield curve
Corporate instruments with a maturity of no more than 270 days
Commercial paper
Maximum maturity of commercial paper
270 days
Bonds backed only by the good faith of the issuing corporation
Unsecured bonds or debentures
Protects bondholder through a written agreement between issuer and trustee
Trust Indenture
Typically backed by real estate holding of a corporation
Mortgage bond
Typically secured by other securities owned by the corporation
Collateral Trust bond
Secured by physical assets owned by the company
Equipment trust certificates
Allow for the exchange of debt for equity issued by the same corporation
Convertible debt
The stated number of common shares a bondholder receives upon conversion
Conversion ratio
The point at which there is neither profit or loss in a conversion
Conversion parity
Purchased at a deep discount; pays no interest during the life of the bond
Zero-coupon bond
The amount of interest paid prior at maturity on a Treasury Bill
None, T-Bills are zero coupon securities
The price of a bond quoted at 105
$1,050
The price of a bond quoted at 97
$970
How bond prices are quoted
As a percentage of par
The difference in basis points between 6.20% and 6.50%
30 basis points
An issuer with outstanding bonds that have a 5% coupon issues similar new bonds with a 6% coupon. The outstanding bonds will trade at a
Discount
An issuer with outstanding bonds that have a 5% coupon issues similar new bonds with a 4% coupon. The outstanding bonds will trade at a
Premium
An investor buys a 6% bond trading at a 6.5% basis. The bond is purchased at a
Discount
An investor buys a 6% bond trading at a 5.5% basis. The bond is purchased at a
Premium
An ATT ZR 13 bond will pay how much to the owner at maturity?
$1,000
U.S. Government instrument that matures in 1 year or less
Treasury Bill
U.S. Government instrument sold through weekly auctions
Treasury Bills
U.S. Government instrument that is quoted on an annualized discounted yield basis
Treasury Bill
U.S. Government instruments that matures within 2 -10 years
Treasury Note
U.S. Government instruments that typically mature in 20 - 30 years
Treasury Bonds
U.S. government instruments that are quoted in 32nds
Treasury Notes and Treasury Bonds
Inflation-indexed bonds issued by the U.S. Treasury
TIPS
U.S. government zero-coupon bond instrument that has no reinvestment risk
STRIP
U.S. non-marketable security that is purchased at a 50% discount and matures to face value in 30 years
Series EE bond
Three government entities that issue mortgage-backed securities
Ginnie Mae, Fannie Mae and Freddie Mac
Government agency that provides student loans
Sallie Mae
Investment risk most associated with mortgage-backed securities
Prepayment risk
Investment risk that coincides with early payment of a mortgage-backed securities
Reinvestment risk
Distinct maturity categories of CMOs
Tranches
Frequency of interest payments on mortgage-backed securities
Monthly
Mortgage-backed securities with the implied backing of the U.S. government
Fannie Mae and Freddie Mac
Debt securities that provide immediate term financing
Money market securities
Source of funds for intermediate to long-term financing for corporate buyers
Capital markets
Denomination of CMOs
$1,000
Protects convertible bondholders from a reduction in ownership percentage
Anti-dilution covenant
The relationship of the coupon rate of a corporation’s convertible debt to its non-convertible debt
Lower
The corporate practice of raising money to call outstanding bonds
Refunding
Bonds sold at a deep discount because of their credit rating
Junk bonds
When interest is paid on 5M XYZ F&A 15 6s bond
February and August 15
The identification number of a bond issue
CUSIP number
A bond that is held in the bondholder’s name
Registered bond
The type of risk rated by Moody’s, Standard & Poor’s and Fitch
Default or Credit Risk
The risk that the issuer will not be able to pay the principal and interest owed on outstanding debt securities
Default or Credit Risk
Amount above par that an issuer may pay to call bonds
Call premium
A bond which can be sold at face value to the issuer prior to maturity at pre-determined times
Puttable bond
The formula for computing current yield
Annual interest divided by current market price
Another name for the coupon yield, which is set at the issuance of the bond
Nominal
Graphically depicts the yield relationship between long- and short-term bonds
Yield curve
Corporate secured bonds that have the highest priority claim
Mortgage bonds
Type of corporate security that is backed by the title to newly acquired equipment
Equipment trust certificate
Two companies that rate bond issues
Moody’s and Standard and Poor’s
Type of bonds often issued by corporations emerging from bankruptcy that pay interest only if income is available
Income bond
The stock price at which a convertible bond can be exchanged for shares of common stock
Conversion price
Federal and state tax treatment of most municipal debt interest
Exempt from taxation at the federal level; may be taxable at the state level
Tax treatment of capital gains from sales of municipal bonds
Taxable
Three entities authorized to issue municipal debt
U.S. territories, State governments, local taxing authorities like county and city governments and certain authorities
Full faith and credit municipal issues
General Obligation bonds
Backing for Municipal General Obligation Bonds
Municipality’s taxing authority
Percentage of net investment income that a REIT must distribute to avoid corporate taxation
90%
For a REIT, the minimum percentage of investment assets that must be invested in real estate
75%
The minimum percentage of gross income that a REIT must derive from rents or mortgage interest
75%
Where REIT shares or certificates of beneficial interest can be purchased
OTC or on stock exchange
Pools of real estate assets that pass through real estate income but not losses
REIT
Demand Deposit Account
A type of bank product where the customer can withdraw funds without advance notice to the bank (i.e. on demand). Examples include checking or savings accounts.
Time Deposits
A bank product where a customer agrees to deposit funds and not withdraw for a set period of time. Over the period the investor will earn a set interest rate. Early withdrawals can result in penalties. Examples include CDs.
