p1 Flashcards
yield to call
the yield of a bond if you were to buy and hold the security until the call date, they are normally called a slight premium
yield to worst
the lowest yield that can be received on a bond without the issuer actually defaulting. It is calculated by looking at the worst case provisions on the bond.. prepayment, call or sinking fund… it’s good for holders just to make sure they can cover their obligations in the worst case senario
yield to maturity
rate of return if the bond is held until maturity, coupons are reinvested at the same rate
bond
allows firms to borrow money and repay over a long period of time
sold
issued
issued
sold
borrower
issuing firm
issuing firm
borrower
principal paid on the due date (maturity) by:
borrower, issuing firm
face value
par value, the amount that the firm must pay at the maturity date
market
bonds already issued, tradable, important for the company to continue to issue bonds
consider selling
interest rates paid by competing investments become more attractive, the issuer becomes less creditworthy
buyers
betting that interest rates will reverse course or the company will get back on it’s feet
collateral
feature of some bonds, assets that back the bonds in case the issuer defaults on the loan
debenture bonds
not back by specific collateral of the issuing company
secured bond
specific assets that serve as collateral in case of default
serial bonds
a portion of the principal is due each year for a number of years
term bonds
most bonds, entire principal is due on a single date
convertible bonds
can be converted into common shares at a future time, beneficial to the investor because they can join in with the growth of equity, better for the firm because they carry a lower interest rate
callable bonds
issuer’s right to retire the bonds, typically stipulates price to be paid at redemption (redemption price, reacquisition price)
redeemable bonds
buyer or investor has the right to retire the bonds
bond pays 10%, interest rates plummet to 6%
company is willing to offer a slight premium over face value for the right to retire bonds so they can borrow at 6%, this is the call price
tax benefits of bonds
interest paid on bonds is deductible for tax purposes but dividends paid on shares are not
DBRS
Canada’s Dominion Bond Rating Service (DBRS) and SP provide investors with ratings for various bonds and notes, DBRS ratings go from AAA to D, C is speculative that has danger of default
strip bonds
a bond where the coupons and principal are stripped
maple bonds
a bond denominated in Canadian dollars that is sold by foreign financial institutions, allows institutions to invest in foreign currencies without worrying about currency risk
fixed-floater
a bond that originally pays a fixed rate and at a specific call date they have the option of taking on a floating rate based off of a benchmark
