Unit 3

Question 1

term bond

Answer 1

the loan principle is paid back in full at once at maturity.

Question 2

serial bond

Answer 2

portions of principle are paid back in scheduled intervals.

Question 3

balloon bond

Answer 3

combines term and serial repayment styles. scheduled principle payments are made with the majority being paid at maturity.

Question 4

series bond

Answer 4

issued by federal gov. and are exempt from certain securities laws

Question 5

coupon rate (nominal yield)

Answer 5

the interest rate of the bond. payment calculated from the bonds par value and coupon rate. if traded between payments, calculation are determined to date. (30day month / 360day year calander)

Question 6

Trading bonds at par, at premium, or at discount.

Answer 6

par = at 1,000
premium = above 1,000
discount = below 1,000

Question 7

Bond Yields

Answer 7

expresses cash interest payments in relation to bonds value. these are measured in basis points.

Question 8

Nominal yield (coupon/stated yield)

Answer 8

set at time of issue.

Question 9

Current yield

Answer 9

measures bonds annual coupon payment relative to its market price.
CY = annual coupon payment / market price

Question 10

yield to maturity

Answer 10

the annualized return of the bond if held to maturity.

Question 11

yield to maturity

Answer 11

the annualized return of the bond if held to maturity.

Question 12

yield to call (call feature)

Answer 12

a bond issued with a call feature can be redeemed before maturity at issuers option. why would issuer pay 6% interest rate when they have dropped to 4%

Question 13

put feature

Answer 13

the investor can put the bond back to the issuer before it matures. (why would investor accept 6% when interest rates have risen to 8%.

Question 14

convertible feature

Answer 14

allow investor to convert the bond to common stock.

Question 15

zero-coupon bond

Answer 15

no debt obligation. issued or sold at deep discount and mature at par. reflects interest rate climate. interest is still taxed on these.

Question 16

Bond rating

Answer 16

a rating system which rates the strengths of borrowers. helps display safety and risk of bond. Rated with letter system.

Question 17

3 major rating agencies

Answer 17

Fitch Ratings Inc.
Moody’s Investors Service Inc.
Standard and Poor’s Rating Service

Question 18

Investment grade debt

Answer 18

bonds rated in top 4 categories. great liquidity. higher score means less risk but less reward bc of lower interest rates and vice versa. bonds with collateral are usually safer.

Question 19

High-Yield Bonds

Answer 19

lower grade bonds with additional risk but higher returns due to higher interest rate.

Question 20

Nonrated bonds

Answer 20

not an indication of quality or risk. many issues are too small to justify paying for a rating.

Question 21

Volatility

Answer 21

a bonds sensitivity to a change in interest. remember bond prices move inversely to interest rates. typically the more time left on bond equals more volatility. The lower the bonds coupon rate the more volatile it is.

Question 22

secured debt securities

Answer 22

Are backed by various kinds of assets owned by the issuer.

Question 23

unsecured debt securities

Answer 23

backed only by the reputation, credit record, and financial stability of the issuer.

Question 24

mortgage bonds

Answer 24

a corporation will borrow money back by real estate and physical assets of the corporation.

Question 25

collateral trust bonds

Answer 25

a corporation will deposit securities into a trust to serve as collateral.

Question 26

equipment trust certificates

Answer 26

when equipment is the collateral that can be repossessed if payments are not made.

Question 27

debentures

Answer 27

a debt obligation backed by a companies word. unsecured.

Question 28

guaranteed bonds

Answer 28

bonds backed by a company other than the issuing corporation. Such as a parent company. unsecured.

Question 29

income bonds

Answer 29

aka adjustment bonds. pay interest only if corporation has enough income to meet interest on debt obligations. usually made by corporations coming out of bankruptcy.

Question 30

Order of liquidation

Answer 30

1. secured debt holders
2. unsecured debt holders
3. subordinated debt holders
4. preferred stockholders
5. common stockholders