Reading 42: fixed income securities- defining elements Flashcards
A dual-currency bond pays coupon interest in a currency:
of the bondholder’s choice.
other than the home currency of the issuer.
other than the currency in which it repays principal.
Dual-currency bonds pay coupon interest in one currency and principal in a different currency. These currencies may or may not include the home currency of the issuer. A currency option bond allows the bondholder to choose a currency in which to be paid. (LOS 42.a)
A bond’s indenture:
contains its covenants.
is the same as a debenture.
relates only to its interest and principal payments.
An indenture is the contract between the company and its bondholders and contains the bond’s covenants. (LOS 42.b)
A clause in a bond indenture that requires the borrower to perform a certain action is most accurately described as:
a trust deed.
a negative covenant.
an affirmative covenant.
Affirmative covenants require the borrower to perform certain actions. Negative covenants restrict the borrower from performing certain actions. Trust deed is another name for a bond indenture. (LOS 42.c)
An investor buys a pure-discount bond, holds it to maturity, and receives its par value. For tax purposes, the increase in the bond’s value is most likely to be treated as:
a capital gain.
interest income.
tax-exempt income.
Tax authorities typically treat the increase in value of a pure-discount bond toward par as interest income to the bondholder. In many jurisdictions this interest income is taxed periodically during the life of the bond even though the bondholder does not receive any cash until maturity. (LOS 42.d)
A 10-year bond pays no interest for three years, then pays $229.25, followed by payments of $35 semiannually for seven years, and an additional $1,000 at maturity. This bond is:
a step-up bond.
a zero-coupon bond.
a deferred-coupon bond.
This pattern describes a deferred-coupon bond. The first payment of $229.25 is the value of the accrued coupon payments for the first three years. (LOS 42.e)
Which of the following statements is most accurate with regard to floating-rate issues that have caps and floors?
A cap is an advantage to the bondholder, while a floor is an advantage to the issuer.
A floor is an advantage to the bondholder, while a cap is an advantage to the issuer.
A floor is an advantage to both the issuer and the bondholder, while a cap is a disadvantage to both the issuer and the bondholder.
A cap is a maximum on the coupon rate and is advantageous to the issuer. A floor is a minimum on the coupon rate and is, therefore, advantageous to the bondholder. (LOS 42.e)
Which of the following most accurately describes the maximum price for a currently callable bond?
Its par value.
The call price.
The present value of its par value.
Whenever the price of the bond increases above the strike price stipulated on the call option, it will be optimal for the issuer to call the bond. Theoretically, the price of a currently callable bond should never rise above its call price. (LOS 42.f)
