Unit 2: Debt Securities Flashcards
Have neither ownership interest in the issuing corporation nor voice in management; as creditors, ___________ receive preferential treatment over common and preferred stockholders if a corporation files for bankruptcy.
Bondholders
_______ are considered senior securities
Bonds
Corporate bonds with maturities of five years or more are known as ______ debt
Funded debt
Who is the nation’s largest borrower and the most secure credit risk?
The federal government
Debt securities with less than one year maturity
Treasury Bills
Debt securities with 2-10 years of maturity
Notes
Debt Securities with more than 10 years maturity
Bonds
The debt obligations of state and local governments and their agencies.
Municipal Securities
Par Value, also known as _____ value, is normally $______ per bond, meaning each bond will be redeemed for $_______ when it matures
face value
$1,000 per bond
$1,000
When the loan principal is repaid to the investor
Maturity Date
Three basic types on bond maturity structires
Term, serial and balloon
Structured so that the principal of the whole issue matures at once
Term bond
Schedules proportions of the principal to mature at intervals over a period of years until the entire balance has been repaid
Serial bond
Physical evidence that designates the bond’s ownership and characteristics (in essence an IOU)
Certificates
A common form of bond issued today; the issuer’s transfer agent records the bondholder’s name. The buyer’s name appears on the bond certificate’s face
Registered bond
Most corporate bonds are issued in _____ ______ form
Fully Registered Form
Owners do not receive certificates. The transfer agent maintains the security’s ownership records. Must U.S. Govt bonds are available only in this form.
Book-entry form
A rating of BBB/Baa or higher to be suitable for purchase by banks.
Investment grade
Investment grade bonds are also known as _______ bonds
Bank-grade bonds
The ease with which a bond or any other security can be sold. The term ______ and marketability are synonymous. Ether term refers to how quickly a security can be converted into cash.
Liquidity
The schedule of interest and principal payments due on a bond issue
Debt Service
When a bond’s principal is repaid
Redeemed
Allows the issuer to redeem a bond issue before its maturity date; either in whole or in part
Call feature
An issuer pays bondholders a premium, a price higher than par
Call premium
If a bond issue’s trust indenture does not include a call provision, the issuer normally can buy bonds in the open market known as _______
Tendering
An advantage to bondholders in periods of declining interest rates.
Call protection feature
An investor purchases 5M ABD J&J 15 8s of ‘21
What will the investor receive at maturity of the bond?
$5,200
Bond Principal = $5,000 (Annual interest is $80 per thousand with semiannual interest of $200 for 5 bonds)
which form a bond must be in for an investor to receive interest and principal payments by mail?
Bonds must be fully registered or in book-entry form
New bonds are issued only in _______ and _______ form.
Fully registered and book-entry form
How much is 80 basis points? I. $8 II. $80 III. .8% IV. 8%
We know that 100 basis points = $10 = 1% of a bond’s face value.
Therefore, 80 basis points = .8% and is worth $8.00 (80 x .10)
As a general rule, highly rated issuers do not establish _______ _______. Lower-rated issuers do so to make their issues more marketable
Sinking funds
______ is the difference between the cal price and par
Call premium
The two primary factors affecting a bond’s market price are the:
Issuer’s financial stability and the overall trends in interest rates.
Generally, the higher a bond’s rating, the ______ its yield.
lower
The highest degree of safety
U.S. Government
Types of U.S. Government Securities:
U.S. Treasury Bills, notes, bonds and savings bonds like Series EE and HH bonds
The second highest degree of safety is in securities issued by __________.
Government agencies
Under what economic circumstances do issuers call bonds?
calls occur when interest rates are declining. Put yourself in the issuer’s shoes. Would you want to pay more interest for the use of money that is necessary?
Investors who purchase callable bonds face what types of investment risk?
Call risk is the risk that the bonds will be called and the investor will lose the stream of income from the bond. Remember that bonds do not pay interest after they have been called. The call feature also causes reinvestment risk. If interest rates are down when the call takes place, what likelihood does the investor have of investing the principal received at a comparable rate?
Both call risk and reinvestment risk also apply to callable preferred stock.
Which of the following would an issuer most likely call?
A. high-interest bond, callable at a premium
B. high-interest bond, callable at par
C. Low-interest bond, callable at a premium
D. Low-interest bond, callable at par
Answer: B. Issuers want to call bonds that are costly to them at as low a price as possible. A high-interest bond with no call premium is the best combination. The issuer would be least likely to call a low-interest bond with a high call premium.
The practice of raising money to call a bond. Specifically, the issuer sells a new bond issue to generate funds to retire an existing issue.
Refunding
Refunding, like a call, can occur in full or in part. Refunding is common for bonds approaching ____________.
maturity
A new issue is sold at a lower coupon before the original bond issue can be called.
Pre-refunded (also known as advance refunding)
The proceeds from the new issue are placed in an escrow account and invested in U.S. government securities. ____________ bonds are generally rated AAA or Aaa, the highest rating available.
Pre-refunded
Advance refunding is a form of ____________, or termination, of the issuer’s obligation; pre-refunded bonds are considered __________ and no longer count as part of the issuer’s debt.
Defeasance; defeased
A bond’s ____________ reflects the annualized return of the bond if held to maturity
Yield to Maturity
A bond with a call feature may be redeemed before maturity at the issuer’s option. __________ calculations reflect the early redemption date and consequent acceleration of the discount gain or premium loss from the purchase price.
Yield to Call
Another term for yield to maturity is ______
basis
Example: A 4% bond trading on a 5% basis is trading at a price to yield 5% to maturity.
The YTC for a premium bond called at par is always ______ than the nominal yield, current yield and YTM
lower
For a bond bought at a discount, YTC is always _______ than the nominal yield, current yield and YTM.
higher
If the bond has a YTC lower than its CY, it is trading at _______
premium
If the bond has a YTM and CY that are equal, the bond is trading at ________
par
If the bond has a YTM less that its YTC, the bond is trading at __________
discount
If a bond has a YTM greater than its coupon, the bond is trading at
discount