Unit 2: Debt Flashcards
Par value
principal or face value (assumed to be $1,000)
Term bond
entire principal is paid at maturity
Serial bond
principal is paid back in portions before maturity
Balloon bond
part of principal is paid before maturity, remainder of principal is paid at maturity
Bond yield
> a bond’s earnings generated over a particular period of time
annual interest relative to bond’s overall value
Nominal/coupon yield
= annual interest / face value of bond (stated coupon rate)
Current yield (CY)
= annual coupon payment / market price of bond
Yield to maturity (YTM, “basis of”)
> annualized return of bond if held to maturity
lower if bond was purchased at premium
higher if bond was purchased at discount
Yield to call (YTC)
> annualized return of bond if redeemed before maturity
lower if bond was purchased at premium
higher if bond was purchased at discount
Call feature
> issuer is able to call in a bond before maturity
>exercised when interest rates are falling, issuer will want to issue new bond with lower interest
Put feature
> investor is able to put bond back to issuer before maturity
>exercised when interest rates are rising, investor will want to purchase a new bond with higher interest
Convertible feature
investor is able to convert bond into shares of common stock
Zero-coupon bonds
> debt instrument that does not pay interest
sold at discount, investor will profit when bond matures and they collect par value
investor charged phantom income tax for theoretical interest earned at maturity
Mortgage bond
> bond backed by real estate owned by corp.
>secured debt
Equipment trust certificate
> bond backed by capital equipment owned by corp.
>secured debt
Collateral trust bond
> bond backed by other securities owned by corp.
>secured debt
Debenture
> bond backed by a corp.’s word
>unsecured debt
Guaranteed bond
> bond backed by a third party corp.’s word
>unsecured debt
Income bond
> bond backed by potential future income of corp.
>unsecured debt
General obligation municipal bonds (GO)
> municipal bond for capital improvements that do not produce own revenue
backed by gov.’s ability to tax
taxed at state level unless buyer lives in issue state
Revenue bond
> municipal bond for capital facility that will produce own revenue
backed by future revenue of facility
taxed at state level unless buyer lives in issue state
Short-term municipal obligations
> municipal bond that generates funds when gov. expects other revenue soon
backed by expected future revenue
less than 12 month maturity
taxed at state level unless buyer lives in issue state
Tax-free equivalent yield
> compares municipal and corporate bond yields
= municipal yield / (100% - investor tax rate)
Treasury bills (T-bills)
>short term Federal bonds >mature in 4, 26 or 52 weeks >pay no interest >issued at discount >taxed at federal, not at state
Treasury notes (T-notes)
> Federal bonds w/ 2-10 year maturity
semiannual interest
taxed at federal, not at state
Treasury bonds (T-bonds)
> Federal bonds w/ 10-30 year maturity
semiannual interest
taxed at federal, not at state
Treasury receipt
> bond made up of Treasury securities sold by private brokerage firms
sells bonds against principal and coupon of original security
TIPS
> bond made up of Treasury securities sold by Treasury
sells bonds against principal and coupon of original security
taxed at federal, not at state
Farm Credit System (FCS)
> sells bonds to raise loanable funds for agricultural financing
not backed by Federal gov.
taxed at federal, not at state
Government National Mortgage Association (GNMA)
> sells bonds to raise money for Department of Housing and Urban Development
backed by mortgages & Federal gov.
taxed at all levels
Federal Home Loan Mortgage Corporation (FHLMC)
> buys mortgages from banks and repackages them into mortgage-backed securities for investors
>not backed by Federal gov.
taxed at all levels
Federal National Mortgage Association (FNMA)
> buys mortgages from Federal gov. and repackages them into mortgage-backed securities for investors
backed by themselves
taxed at all levels
Money market security
source of short-term funds
Certificate of deposit (CD)
> issued by banks to provide short term funds
can be traded on secondary market
jumbo CD has face value of $100K+
Banker’s acceptance (BA)
> postdated check or line of credit to be exercised within 1-270 days
Commercial paper
> raises cash for smaller business purposes (A/R or inventory needs)
Federal funds
> excess deposit in a Federal Reserve bank over required amount
can be loaned to other Feds to help them meet holdings requirement
Collateralized mortgage obligations (CMO)
> security backed by pool of mortgages
spreads risk across all underlying mortgages
divided into tranches based on mortgages’ maturity date
Collateralized debt obligations (CDO)
> security backed by pool of non-mortgage loans
>spreads risk across all underlying loans
