Lesson 4

Question 1

• It is a documented, binding obligation that provides funds to an entity
in return for a promise from the entity to repay a lender or investor in
accordance with terms of a contract.
• Debt instrument contracts include detailed provisions on the deal
such as collateral involved, the rate of interest, the schedule for
interest payments, and the timeframe to maturity if applicable.
• are tools an individual, government entity, or
business entity can utilize for the purpose of obtaining financing.
• provide funds to an entity that promises to repay
the it over time.

Answer 1

Debt instruments

Question 2

obligations both personal and
corporate that are paid within one year.
Examples: credit card bills, payday loans, consumer loans, revolving
credit lines, treasury bills

Answer 2

Short-term debt instruments

Question 3

obligations due for payment for over
a year through periodic installment payments.
Example: mortgages, notes, leases, bonds

Answer 3

Long term debt instruments

Question 4

• A is a debt instrument that can be bought or sold between two
parties and has basic terms defined, such as the notional amount (the amount
borrowed), interest rate, and maturity and renewal date.
• are financial assets that entitle their owners to a stream of
interest payments.
• Unlike equity securities, require the borrower to repay the
principal borrowed.
• The interest rate for a debt security will depend on the perceived
creditworthiness of the borrower.
• Bonds, such as government bonds, corporate bonds, municipal bonds,
collateralized bonds, and zero-coupon bonds, are a common type of debt
security.
• NOTE: is a debt instrument however, not all debt instruments are
debt securities.

Answer 4

debt security

Question 5

is the type of financial market in the form of debt
transactions between demanders and suppliers of funds.
This is the:
a. Money market for short term debts
b. Capital market for long term debts (bonds)

Answer 5

Debt Securities Market

Question 6

primarily includes government-issued securities and
corporate debt securities, facilitating the transfer of capital from savers
to the issuers or organizations requiring capital for government
projects, business expansions and ongoing operations.
The goal of the bond market is to provide long-term financial aid and
funding corporate and government entities.

Answer 6

The bond market

Question 7

• A bond is a certificate of indebtedness whereby the borrower agrees to
pay a sum of money at a specified future date plus periodic interest
payments at the stated rate.
• They are commonly issued in denominations of P1,000, P5,000, or
P10,000, referred to as face value or par value.
• Normally, a corporation sells all of its bonds to an investment firm,
referred to as an underwriter, which resells the bonds to the investing
public. In some instances, bonds are sold directly to investors.
• The contract between the issuing corporation and the bondholder is known
as bond indenture. The bond indenture specifies the terms of the bonds,
rights and duties of both parties, restrictions on the issuing corporation
and all other important details affecting the contracting parties.

Answer 7

NATURE OF BONDS

Question 8

• mature on a single date

Answer 8

Term bonds

Question 9

• - mature in installments

Answer 9

Serial bonds

Question 10

• provide security and protection to investors in the
form of specific assets of the issuer, such as real estate or other
collateral.

Answer 10

Secured bonds -

Question 11

• secured by a lien against real
  estate

Answer 11

o Real estate mortgage bond

Question 12

• secured by shares of stocks and bonds
  held by the issuer as investments

Answer 12

o Collateral trust bond

Question 13

• secured by a lien against movable
  property like motor vehicles

Answer 13

o Chattel mortgage bond

Question 14

• frequently termed as debentures. These are not
  protected by the pledge of any specific asset of the issuing
  corporation. The issue of debenture bonds is generally based on the
  credit rating of the company, as these bonds arc backed only by the
  issuer’s general favorable credit standing. An issuer of debenture
  bonds must be financially strong to attract investors to buy at
  favorable interest rates.

Answer 14

Unsecured bonds

Question 15

• bonds whose owners’ names are registered in
  the books of the issuing corporation. When these bonds are sold, the
  transfer agent cancels the original certificate surrendered by the
  seller, and a new certificate is issued and registered in the name of
  the new bondholder. Interest checks are mailed periodically to the
  bondholders of record.

Answer 15

Registered bonds

Question 16

not recorded in the name of the
owner. Each bond is accompanied by coupons representing periodic
interest payments, covering the life of the issue. The issue of bearer
bonds eliminates the need for recording changes in the ownership as
well as preparing and mailing periodic interest checks.

Answer 16

• Bearer bonds or coupon bonds -

Question 17

• those that give the issuing company
  the right to call or retire the bonds before maturity date, usually
  specified on the bond indenture. The issuing company pays the
  bondholder an amount in accordance with the call provisions.

Answer 17

Callable or redeemable bonds

Question 18

• those that give the bondholders the right to
  exchange their bond holdings into a specified or predetermined
  number of the issuing corporation’s shares of stock.

Answer 18

• Convertible bonds

Question 19

• are issued at
significantly lower than their face value. Total interest on these
bonds during their entire term is paid together with the principal
amount on maturity date.

Answer 19

Zero-interest bonds or deep-discount bonds -

Question 20

– this is the fixed interest rate or return of the bond which
is paid to the bondholders.

Answer 20

Coupon rate

Question 21

– this is the period when the bond issuer pays the investor
at full-faced value of the bond.

Answer 21

Maturity date

Question 22

– bonds can be purchased at par, below par or
above par. The market price depends on the level of interest rate in the
market.

Answer 22

Current or market price