Module 2: Debt Securities Flashcards
Ways a bond can be issued
registered form, bearer form, and book-entry form.
Registered Form
payments will be made to the owner of record
Bearer form
payments will be made to whoever holds or possesses the bond
Book-Entry form
its record of ownership is held electronically in a central depository, allowing for greater efficiency in bond transactions
Bond Indenture
Formal agreement, or contract, between the issuer and the bondholder
Sinking Fund
A separate fund established and funded each year by the bond issuer; it is designed to accumulate an amount required to pay off the debt at maturity.
OID Bond
A bond that is issued at.a discount
Secured Bond
pledges specific assets that may be sold by the bond purchaser in the event that the bond issuer defaults in paying
Debenture
An bond that pledges no specific assets. Unsecured
Investment Grade
BBB- or higher by SP
High Yield Bond
BB+ or lower
Term vs. Serial Obligation Bond
Term Bond - single maturity date
Serial Obligation Bond - series of maturity dates, each maturity date being a subset of the original issue.
Types of Risk Associated with Bonds (8)
Interest Rate Risk Reinvestment Rate Risk Call Risk Financial Risk Default (Credit) Risk Purchasing Power Risk Liquidity Risk Event Risk
Reinvestment Rate Risk
There is a risk that you are reinvesting the coupon payments at a lower interest rate than the bond you’re receiving the coupon payments from. Zero-Coupon Bonds are not subject to reinvestment rate risk.
Financial Risk
Associated with the level of debt an issuer has outstanding.
Liquidity Risk
MEasured by the spread between the bid price and the ask price quoted by a dealer. The wider the spread, the more liquidity risk.
Event Risk
The possibility that a bond issue will be affected by an unanticipated and damaging event.
Types of Bond Issuer
Federal Government Federal Government Agencies Municipalities Corporations International Issuers
US Treasury Notes
Maturity Dates of 2,3,5,7,10 years
US Treasury Bonds
Maturity of 30 years
US Government Notes and Bonds
Issued at their stated par value and provide semiannual coupon payments. Sold in increments of $100 with a $100 minimum purchase.
- Competitive and Noncompetitive Yield Bids
- Exempt from taxation at both state and local levels, but taxable as ordinary income rates for federal tax purposes.
Competitive yield bids
the Treasury determines the highest yield it must offer to achieve its sales goals
Bond Tax Characterstics (OID)
Original Issue Discount (OID) must be calculated for anyone who did not pay more than the Face Value for their bond. This is considered phantom income, and the investors basis is then increased by the amount of the OID included in income each year.
Types of US Government Securities
- Notes and Bonds
- Treasury STRIPS
- TIPS
- Savings Bonds
- US Government Agency Securities