Fixed-Income Securities Flashcards
Ch 10
agency bonds
Debt securities issued by various agencies and organizations of the U.S. government. (Chapter 10)
asset-backed securities (ABSs)
Securities similar to mortgage-backed securities that are backed by a pool of bank loans, leases, and other assets. (Chapter 10)
bond ratings
Letter grades that designate investment quality and are assigned to a bond issue by rating agencies. (Chapter 10)
bond rating agencies
Institutions that perform extensive financial analysis on companies issuing bonds to assess the credit risk associated with a particular bond issue. (Chapter 10)
bonds
Long-term debt instruments (IOUs), issued by corporations and governments, that offer a known interest return plus return of the bond’s face value at maturity. (Chapters 1 and 10)
call feature
Feature that specifies whether and under what conditions the issuer can retire a bond prior to maturity. (Chapter 10)
call premium
The amount added to a bond’s par value and paid to investors when a bond is retired prematurely. (Chapter 10)
call price
The price the issuer must pay to retire a bond prematurely; equal to par value plus the call premium. (Chapter 10)
collateral trust bonds
Senior bonds backed by securities owned by the issuer but held in trust by a third party.(Chapter 10)
collateralized mortgage obligation (CMO)
Mortgage-backed bond whose holders are divided into classes based on the length of investment desired; principal is channeled to investors in order of maturity, with short-term classes first. (Chapter 10)
conversion equivalent (conversion parity)
The price at which the common stock would have to sell in order to make the convertible security worth its present market price. (Chapter 10)
conversion period
The time period during which a convertible issue can be converted. (Chapter 10)
conversion price
The stated price per share at which common stock will be delivered to the investor in exchange for a convertible issue. (Chapter 10)
conversion privilege
The conditions and specific nature of the conversion feature on convertible securities. (Chapter 10)
conversion ratio
The number of shares of common stock into which a convertible issue can be converted. (Chapter 10)
conversion value
An indication of what a convertible issue would trade for if it were priced to sell on the basis of its stock value. (Chapter 10)
convertible bonds
Fixed-income obligations that have a feature permitting the holder to convert the security into a specified number of shares of the issuing company’s common stock. (Chapter 10)
coupon
Feature on a bond that defines the amount of annual interest income. (Chapter 10)
coupon rate
A bond’s coupon expressed as a percentage of its par value. (Chapter 10)
current yield
Measure of the annual interest income a bond provides relative to its current market price. (Chapters 10 and 11)
debenture
An unsecured (junior) bond. (Chapter 10)
deferred equity
Securities issued in one form and later redeemed or converted into shares of common stock. (Chapter 10)
discount bond
A bond with a market value lower than par; occurs when market rates are greater than the coupon rate. (Chapter 10)
equipment trust certificates
Senior bonds secured by specific pieces of equipment; popular with transportation companies such as airlines. (Chapter 10)
equity kicker
Another name for the conversion feature, giving the holder of a convertible security a deferred claim on the issuer’s common stock. (Chapter 10)
Eurodollar bonds
Foreign bonds denominated in dollars but not registered with the SEC, thus restricting sales of new issues. (Chapter 10)
face value
The value that a bond issuer must pay to the investor when the bond matures. (Chapter 10)
first and refunding bonds
Bonds secured in part with both first and second mortgages. (Chapter 10)
forced conversion
The calling in of convertible bonds by the issuing firm. (Chapter 10)
general obligation bonds
Municipal bonds backed by the full faith, credit, and taxing power of the issuer. (Chapter 10)
high-yield bonds
Bonds with below investment-grade ratings, also known as junk bonds. (Chapter 10)
income bonds
Unsecured bonds requiring that interest be paid only after a specified amount of income is earned. (Chapter 10)
investment-grade bonds
Bonds with ratings in the three or four highest ratings categories issued by bond rating agencies. (Chapter 10)
investment value
The price at which a convertible would trade if it were nonconvertible and priced at or near the prevailing market yields of comparable nonconvertible issues. (Chapter 10)
junior bonds
Debt obligations backed only by the promise of the issuer to pay interest and principal on a timely basis. (Chapter 10)
junk bonds
High-risk securities that have low ratings but high yields. (Chapter 10)
liquid yield option note (LYON)
A zero-coupon bond that carries both a conversion feature and a put option. (Chapter 10)
maturity date
The date on which a bond matures and the principal must be repaid. (Chapter 10)
mortgage-backed bond
A debt issue secured by a pool of home mortgages; issued primarily by federal agencies. (Chapter 10)
mortgage bonds
Bonds that are secured by real estate. (Chapter 10)
municipal bond guarantees
Guarantees from a party other than the issuer that principal and interest payments will be made in a prompt and timely manner. (Chapter 10)
municipal bonds
Debt securities issued by states, counties, cities, and other political subdivisions; most of these bonds are tax-exempt (free of federal income tax on interest income). (Chapter 10)
note
A medium-term debt security that matures in 2 to 10 years. (Chapter 10)
par value
The stated, or face, value of a stock. (Chapter 6) Also, the value that a bond issuer must pay to the investor when the bond matures. (Chapter 10)
payback period
The length of time it takes for the buyer of a convertible to recover the conversion premium from the extra current income earned on the convertible. (Chapter 10)
PIK bond
A “payment in kind” junk bond that gives the issuer the right to make annual interest payments in new bonds rather than in cash. (Chapter 10)
premium bond
A bond with a market value in excess of par; occurs when interest rates drop below the coupon rate. (Chapter 10)
principal
On a bond, the amount of capital that must be repaid at maturity. (Chapter 10)
refunding protection provisions
Provisions that prohibit the premature retirement of an issue from the proceeds of a lower-coupon refunding bond. (Chapter 10)
revenue bonds
Municipal bonds that require payment of principal and interest only if sufficient revenue is generated by the issuer. (Chapter 10)
securitization
The process of transforming lending vehicles such as mortgages into marketable securities. (Chapter 10)
senior bonds
Secured debt obligations, backed by a legal claim on specific property of the issuer. (Chapter 10)
serial bond
A bond that has a series of different maturity dates. (Chapter 10)
sinking fund
A provision that a firm must retire a bond issue gradually over time. (Chapter 10)
split rating
A different rating given to a bond issue by two or more rating agencies. (Chapter 10)
subordinated debentures
Unsecured bonds whose claim is secondary to other debentures. (Chapter 10)
taxable equivalent yield
The return a fully taxable bond would have to provide to match the after-tax return of a lower-yielding, tax-free municipal bond. (Chapter 10)
term bond
A bond that has a single, fairly lengthy maturity date. (Chapter 10)
Treasury bonds
U.S. Treasury securities that are issued with 30-year maturities. (Chapter 10)
Treasury Inflation-Protected Securities (TIPS)
A type of Treasury security that provides protection against inflation by adjusting investor returns for the annual rate of inflation. (Chapter 10)
Treasury notes
U.S. Treasury debt securities that are issued with maturities of 2 to 10 years. (Chapter 10)
Treasury strips
Zero-coupon bonds created from U.S. Treasury securities. (Chapter 10)
Yankee bonds
U.S. dollar-denominated debt securities issued by foreign governments or corporations and traded in U.S. securities markets. (Chapters 2 and 10)
zero-coupon bonds
Bonds with no coupons that are sold at a deep discount from par value. (Chapter 10)
