Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Finance 360 > S9: Bond Basics and Definitions > Flashcards

S9: Bond Basics and Definitions Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 66 flashcards SIE Exam flashcards Series 63 flashcards Series 79 Top-Off Exam flashcards Series 7 Top-off Exam flashcards CFA flashcards Series 65 flashcards
1
Q

Bonds

A

Debt instruments used by firms or governments to borrow money for their investments. It is a contractual relationship between the borrower and lender.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Face/principal/par value

A

The amount borrowed written on the loan, to be repaid at the end of the bond’s term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Maturity

A

How long until the bond is repaid by the borrower/debtor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Coupons

A

The interest payments made on the bond, determined by the coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Coupon rate

A

Determined by prevailing interest rates in the economy at the time the bond is issued (the riskier the bond, the higher the investor requires the coupon rate to be). Normally relative to T-Bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Yield to Maturity (AKA Yield)

A

The annual rate of return one earns when buying a bond at a given price, collecting all coupons, and receiving the face value at the end of the term to maturity (Can be different if bond is not purchased at face value)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Discount Bond

A

You pay less than the face value of the bond, therefore the YTM will be higher than the coupon rate because they are inversely related

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Premium Bond

A

You pay more than the face value of the bond, therefore the YTM will be lower than the coupon rate because they are inversely related

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Indenture

A

Bond’s written agreement between the borrower and the lender, often several 100 pages and includes basic terms and total amount of the bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Basic terms

A

Coupon rate, principal, term to maturity, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Total amount of the bond

A

How much total $ was raised by the firm

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Collateral (Component of bond indenture)

A

Property or rights the lenders get if the borrowers can’t pay - most corporate debt doesn’t offer collateral

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Secured bond

A

Offers collateral, lower IR bc less risky

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Debentures/unsecured bond

A

No collateral, higher IR bc more risky

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Call Provisions (Component of bond indenture)

A

Allow the firm to call a bond and repay it early, often at a call premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Call premium (Component of bond indenture)

A

When a firm calls a bond early, they may pay a bit extra over the bond’s face value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Deferred call provisions/call protected bonds (Component of bond indenture)

A

Prohibit bonds from being called within a set of years after the bond is issued for the 1st time, less risky for investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Sinking fund (Component of bond indenture)

A

An account managed by the trustee into which the borrowing firm can make payments to retire portions of the debt early. The trustee can, on behalf of the firm, repurchase bonds from WILLING shareholders on behalf of the firm who wish to get the par-value back early and retire the bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Trustee

A

Someone who is repurchasing bonds on behalf of the firm, a financial institution

20
Q

Seniority (Component of bond indenture)

A

The order of which bondholders are paid in the event of default (Senior debt holders -> Junior/subordinate debt holders -> residual claimants (Equity holders, preferred then common stock holders)

21
Q

Protective covenants (Component of bond indenture)

A

Limit certain actions of the firm that it may undertake during the term of the loan

22
Q

Negative covenants

A

Prohibit actions - such as limiting amount of dividends, additional debt issuance, preventing mergers with other firms, or pledging of collateral to another lender

23
Q

Positive covenants

A

Require actions - such as keeping working capital above certain levels or maintaining the collateral

24
Q

Credit Rating Agencies

A

Assign rating to borrowers (firms or government) based on their riskiness and probability of default. The riskier the issuer, the higher the bond yield must be for investors to take on risk of investing

25
Q

Top 3 credit rating agencies

A

Moody’s, S&P Global, Fitch

26
Q

Default

A

Failure of a firm or government issuer to make payments to lenders

27
Q

Investment Grade

A

Bonds that are safer and offer lower rates of return

28
Q

Speculative Grade (AKA Junk Bonds)

A

Riskier and offer higher rates of return (Subordinate, callable, debenture (unsecured), without protective covenants, highly leveraged firm)

29
Q

Treasury Bills (T-Bills)

A

Government bonds that have maturity up to a year. They are discount bonds paying no coupons issued by the federal government

30
Q

Treasury Notes and Bonds

A

Government bonds that have longer maturities and pay coupons twice yearly

31
Q

Treasury Notes Duration

A

Up to 10 years

32
Q

Treasury Bonds Duration

A

10-30 years

33
Q

Primary Treasury Market

A

www.TreasuryDirect.gov

34
Q

Secondary Treasury Markets

A

Buy from other bondholders

35
Q

Over the counter (Secondary Treasury Markets)

A

Between dealers who buy and sell bonds from various parties to add to their inventory

36
Q

Bid Prices (Secondary Treasury Markets)

A

The price dealer will pay you the investor for a bond if you have one to sell

37
Q

Ask Price (Secondary Treasury Markets)

A

The price dealer will ask that you the investor pay for a bond if you want to buy one

38
Q

Bid-Ask Spread (Secondary Treasury Markets)

A

Difference between bid and ask price, how the dealer makes their $ (Ask > Bid)

39
Q

Asked Yield (Secondary Treasury Markets)

A

The annual rate of return if you buy a bond at its ask price and hold it to maturity

40
Q

Municipal Bonds (Munis)

A

Issued by state and local governments, but they can default. Coupon payments are tax exempt from federal income taxes, and therefore attractive for higher tax-bracket investors

41
Q

The Yield Curve

A

Shows relationship of term structure of interest rates

42
Q

Term Structure of Interest Rates

A

Relationship between interest rates and time to maturity

43
Q

Normal Shape/Normal Times

A

Investors prefer shorter term bonds and their prices are higher than long term bonds with same coupon rates because IRs are expected to rise and investors don’t want their money “locked up” at a lower rate than what is to come

44
Q

Inverted Shape/Pre-Recession Times

A

Investors prefer longer term bonds and their prices are higher than short term bonds with same coupon rates because IRs are expected to fall and investors want their money “locked up” at a higher rate than what is to come

45
Q

How are price and yield (return) related?

A

INVERSELY

Finance 360 (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions