Fundamentals of Debt Securities Flashcards
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
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.
What does yield-to-maturity (YTM) take into account that current yield does not? 3
- Discount/Premium made or lost at maturity,
- reinvestment of interest at YTM, and
- time value of money
Are prerefunded bonds quoted on a yield-to-maturity (YTM) or yield-to-call (YTC) basis?
YTC
Accrued interest on T-Notes and T-Bonds is calculated using ______ days in the month and _____ days in the year.
Accrued interest on T-Notes and T-Bonds is calculated using actual days in the month and 365 days in the year.
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
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.
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.
What is the formula for calculating a bond’s current yield?
Annual Interest ÷ Current Market Price
How do investors holding bearer bonds receive interest?
By clipping the attached coupons
What is the maturity type where a portion of principal is retired each year?
Serial bond
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
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: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
How do investors receive interest on fully registered bonds?
Interest is mailed to the owner of record.
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 is the highest credit rating?
AAA for S and P and Fitch, and Aaa for Moody’s
The yield curve is ___________________________ when short-term bonds have higher yields than long-term bonds.
The yield curve is inverted (negative/descending) when short-term bond yields are higher than long-term bonds.
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
What does a normal, positive, ascending, or upward sloping yield curve indicate?
Bonds with longer maturities have higher yields than bonds with shorter maturities.
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.
Describe call protection.
The number of years after issuance during which bonds may not be called by the issuer
The ________________ the duration, the greater the bond’s price sensitivity.
The longer/greater the duration, the greater the bond’s price sensitivity.
Given a yield change, ____________ bonds move more in price.
Given a yield change, long-term bonds move more in price (lower coupon or longer duration are also correct.)
Bonds rated ___________ and higher are considered investment grade.
Bonds rated BBB (for S and P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.
Refunding would most likely occur when interest rates have _________.
Refunding would most likely occur when interest rates have fallen.
Credit risk measures the issuer’s risk of _________________________.
Credit risk measures the issuer’s risk of default on debt service.
What is the impact on bonds that have been prerefunded?
Credit is improved and the issue is considered defeased for the issuer.
Which interest rates are generally more volatile?
Short-term rates
What is the original issue that is being refunded called?
Prerefunded bonds
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
Bonds rated BB (Ba) or lower are considered speculative or junk bonds.
Bondholders are also referred to as ____________.
Bondholders are also referred to as creditors.
May bonds be called early due to an event which destroys the source of revenue backing the bond?
Yes, when using a catastrophe call
True or False: A flat yield curve reflects both long and short-term yields being the same.
True
A bond trading at a price below par is a __________ bond.
A bond trading at a price below par is a discount bond.
Calculate the price of a corporate bond quoted at 98 ¾.
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.
Define real interest rate (real rate of return).
Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
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.
$______ is the par value for bonds.
$1,000 is the par value for bonds.
When executing a refunding, into what account would the new issue proceeds be placed?
An escrow account managed by a trustee.
Are U.S. Government and municipal securities traded on an exchange or OTC?
OTC
____________ 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.
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
Bond interest is stated ___________ and paid ________________.
Bond interest is stated annually and paid semi-annually.
Are serial or term bonds more likely to have a sinking fund?
Term bonds are more likely to have a sinking fund.
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%)
A bond trading at a price above par is a ____________ bond.
A bond trading at a price above par is a premium bond.
Define duration.
The measure, expressed in years, of a bond’s price sensitivity to interest rate changes
A type of maturity where all bonds mature on one specific date is called a _______ bond.
A type of maturity where all bonds mature on one specific date is called a term bond.
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%)
A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?
YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.
_________ pay for bonds to be rated.
Issuers pay for bonds to be rated.
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
False. There is an inverse relationship between interest rates and prices.
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
YTM, Current Yield, Nominal Yield
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.
