FC Ch 1 Flashcards
Bondholders are also referred to as ____________.
Bondholders are also referred to as creditors.
What is LIBOR?
The London Interbank Offered Rate, which is the benchmark against which other rates are compared
Define escrowed to maturity (ETM).
When a bond is issued to prerefund an existing bond at its ultimate maturity date
A bond priced at 101 1/2 is equal to what dollar amount?
Convert fraction to a decimal: 1 ÷ 2 = .50 and then multiply $1,000 by 101.50% = $1,015.00
$______ is the par value for bonds.
$1,000 is the par value for bonds.
Describe inflation or purchasing power risk.
The risk that today’s investment will not be worth as much when the money is received in the future.
What does one basis point represent as a percentage?
0.01%
A bond with an 8% coupon would pay how much interest per year?
$80.00. Par x Rate ($1,000 x 8%)
The money held in escrow from a refunding is invested in _________________________.
The money held in escrow from a refunding is invested in U.S. Government securities.
An investor with a long-term need for tax-free funds would consider which type of bond?
Zero-coupon municipal
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
What is level debt service?
Each year’s debt service payments remaining generally equal.
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
What type of bond pays all of its interest at maturity?
A zero-coupon bond pays all of its interest at maturity.
Which type of bond has no reinvestment risk?
A zero-coupon bond
The term ____________ refers to the form of issuance where there are no physical certificates delivered.
The term Book Entry refers to the form of issuance where there are no physical certificates delivered.
True or False: The discount on a zero-coupon bond is considered accreted OID interest.
True
____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
What are bonds called that pay variable rates of return?
They are called floating rate, adjustable rate, or variable rate bonds.
The __________________ represents the amount above par that issuers pay to redeem bonds early.
The call premium represents the amount above par that issuers pay to redeem bonds early.
When do municipal bond trades settle?
Two business days after the trade date (T+2)
Define duration.
The measure, expressed in years, of a bond’s price sensitivity to interest rate changes
On what day does the computation of accrued interest begin?
The previous interest payment date
What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.
$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)
True or False: Investors may exercise a bond’s call privilege any time after issuance.
False. Only issuers may exercise the call privilege after the call protection period has passed.
True or False: The longer a bond’s duration, the less sensitive the bond’s price is to changes in interest rates.
False. The longer the duration, the greater a bond’s price sensitivity to changes in interest rates.
A bond trading at a price of $1,000 is a ______ bond.
A bond trading at a price of $1,000 is a par bond.
A bond has a basis of 7 1/4%. This is synonymous with the bond’s __________________.
A bond has a basis of 7 1/4%. This is synonymous with the bond’s yield to maturity (YTM).
What is the formula for calculating a bond’s current yield?
Annual Interest ÷ Current Market Price
Define defeasance as it relates to callable bonds.
A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient to pay debt service
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
Describe call protection.
The number of years after issuance during which bonds may not be called by the issuer
A municipal bond’s coupon payment date is the 15th. For that month, how many days remain for accrued interest purposes
16, since the interest payment date must be included when counting the days.
True or False: An investor who is interested in income and safety of principal should buy a zero-coupon bond.
False. Zero-coupon bonds do not provide a payment until maturity and are inappropriate for income seeking investors.
Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.
Accrued interest on municipal bonds is calculated using 30 days in the month and 360 days in the year
Debt service represents the total of all ____________ and ____________ payments.
Debt service represents the total of all principal and interest payments.
When an entire bond issue matures on the same date, the bond is referred to as a _______ bond.
When an entire bond issue matures on the same date, the bond is referred to as a term bond.
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
The destruction of a facility that is financed by a bond offering may result in a(n) _____________ call.
The destruction of a facility that is financed by a bond offering may result in an extraordinary call.
A bond trading at a price below par is a __________ bond.
A bond trading at a price below par is a discount bond.
The difference between a municipal zero’s issue price and par is called the __________________.
The difference between a municipal zero’s issue price and par is called the original issue discount (OID).
A bond priced at 98 1/8 is equal to what dollar value?
Convert fraction to a decimal: 1 ÷ 8 = .125 and then multiply $1,000 by 98.125% = $981.25.
True or False: Delayed delivery is when settlement occurs more than two business days after the trade date.
True
A ___ provision on a bond helps limit interest-rate risk when interest rates are rising.
A put provision on a bond helps limit interest-rate risk when interest rates are rising.
If a client buys a book entry bond, how does she receive trade notification?
Through her confirmation and account statement
When discussing a bond, the YTM may also be referred to as _______.
When discussing a bond, the YTM may also be referred to as basis.
When executing a refunding, into what account would the new issue proceeds be placed?
An escrow account managed by a trustee.
A capital appreciation bond (CAB) is a form of ___________ bond.
A capital appreciation bond (CAB) is a form of zero-coupon bond.
Refunding would most likely occur when interest rates have _________.
Refunding would most likely occur when interest rates have fallen.
What is the impact on bonds that have been prerefunded?
Credit is improved and the issue is considered defeased for the issuer.
What is a municipal convertible bond?
A zero-coupon or capital appreciation bond (CAB) that may be converted into an interest bearing bond
What are the requirements for a bond to be considered depository eligible?
The bond must be registered under the Securities Act of 1933 or be exempt from registration
What is the formula for determining a bond’s current yield?
Annual interest ÷ current market value of the bond
Identify the risk of existing bond prices declining while interest rates are rising.
Interest rate risk
extra
extra
What does yield-to-maturity (YTM) take into account that current yield does not?
Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money
If a CAB is issued at $500 and matures at $1,000, what amount would count against a city’s debt limit?
$500 would count against a city’s debt limit
True or False: Call features are considered a disadvantage to the bondholder.
True
Bonds with ______ maturities generally have level debt service.
Bonds with serial maturities generally have level debt service.
If a zero-coupon bond is issued at $500 and matures at $1,000, what amount would count against a city’s debt limit?
$1,000 would count against a city’s debt limit
A bond trading at a price above par is a ____________ bond.
A bond trading at a price above par is a premium bond.
The ________________ the duration, the greater the bond’s price sensitivity.
The longer/greater the duration, the greater the bond’s price sensitivity.
When money flows from the refunded issue to the refunding issue it is referred to as ___________________.
When money flows from the refunded issue to the refunding issue it is referred to as crossover refunding.
When a bond issue matures on a sequential basis, this is referred to as a _________ bond.
When a bond issue matures on a sequential basis, this is referred to as a serial bond.
Define level debt service.
When total interest and principal payments are generally equal each year
True or False: Call provisions are usually considered an advantage to the bondholder.
False. Call provisions are an advantage to the issuer.
Bond interest is stated ___________ and paid ________________.
Bond interest is stated annually and paid semi-annually.
True or False: In whole calls are conducted by lottery.
False. Partial calls are conducted by lottery.
On what day does the computation of accrued interest stop?
The day before settlement date
