Unit 3 Debt Securities (Bonds) Flashcards
what is a bond?
a loan / debt security
who are issuers of bonds?
corporations, municipalities, U.S. government
who are the participants of a bond?
issuers and investors
what does a bond pay?
fixed interest semiannually
how long does a bond pay for?
a stated period until it matures
what happens at bond maturity?
balance of the loan is repaid in a lump sum
what value are bonds issued at?
par value with fixed interest rate
which market do bonds trade in?
secondary market
how do bonds trade in secondary market?
at premium or discount
what are the types of corporate bonds?
secured and unsecured
what are secured bonds backed by?
specific asset such as mortgages, equipment, or other collateral owner by issuer
what are unsecured bonds backed by?
issuer’s credit and promise to pay
what are u.s. gov. bonds charactarized by?
high liquidity and safety of principal since they are backed by full faith and credit of the federal gov.
who issues municipal bonds?
states, counties, cities, or other political subdivisions
what backs municipal bonds?
either the taxing power of the municipality or the revenue generated from fees by users of municipal bonds
what are money market securities?
short- term debt instruments
when do money market securities mature?
1 year or less
what are characteristics of money market securities?
highly liquid and offer safety of principal
where are issuer’s bonds sold?
primary offering
what is a typical time frame for bond maturity?
10-30 years from the date of issue
what is principal?
amount of money borrowed by the issuer
what is par value? how much?
face value, $1000
when is interest paid?
semiannually
when is principal paid?
at maturity
what are bond issue structures?
term, serial, or series bonds
what is the structure of a term bond?
every bond having the same interest rate and maturity date
what is the structure of a serial bond?
varying maturities and interest rates
how are corporate and US gov bonds structured?
term bond
how are municipal bonds structured?
serial bond
what is the structure of a balloon maturity?
a larger amount of bonds maturing on a specific date
what is the structure of a series bond?
varying dates of issuance all maturing at the same time
what is a coupon rate?
bond’s annual rate
what is coupon rate expressed as?
par value or $1000
when is interest paid on coupon rate?
semiannually
how is coupon paid?
on the original $1000 principal balance
what is another name for coupon rate?
nominal yield (NY)
what is nominal yield/ coupon rate based on
$1000 par value
how much of annual interest are bond holders paid?
half of the annual interest per payment
what is a zero-coupon bond?
bonds that have no coupon at all but are issued at a discount from par
what is the interest on a zero- coupon bond?
the difference between the discounted purchase price and par
when is interest paid on zero-coupon bonds?
at maturity when the principal is repaid
what is the accreted value?
value at any given time of a debt instrument that accrues(grows) interest over multiple years
what is accretion?
method of taxing imputed interest
what is imputed intetrest?
interest you are paying taxes on but have not yet received
what is a maturity date?
time at which the borrower will repay the face value (principal balance) to the bondholder
what is redemption?
repayment of principal on the maturity date
what does the lenders’ final payment include?
par value and the last semiannual coupon payment
when is the lender’s final payment due
at maturity from the issuer
what is a short term debt instrument(bond)?
maturity date 2 years or less
what is a intermediate term debt instrument (bond)?
maturity date 2-10 years
what is a long term debt instrument (bond) ?
maturity of 10 or more years
what type of underwriting is generally used for general obligation issues?
competitive bid
what is current yield? (current market price for the bond)
bond’s coupon and the price paid for the bond
Municipal bonds with interest rates that are reset at specific intervals or after a specific event has occurred are called
Variable rate bonds
negotiable certificates of deposit characteristics
have a maturity of 1 year or less
characteristic of zero-coupon bonds (3)
- purchased at a discount from par 2. pay no current income 3. more volatile than coupon bonds
pay par at maturity, no semiannual interest, but their ‘phantom income’ is taxed each year
A bond paying a 10% coupon rate is trading at a discount. The current yield will be
Higher than the coupon rate (When bond prices decline (discount bonds), yields rise)
what is a treasure receipt? T-Receipt
A treasury receipt is a zero-coupon security
who creates treasure receipts? T-Receipt
broker - dealers
what type of Treasury securities are Treasury Receipts backed by?
T-notes or T-bonds
what are the two Treasury Securities?
T- notes and T-bonds
what is Commercial paper and what is it used for?
unsecured, short-term debt up to 9 months in maturity. It is used by corp. to fill short-term cash flow needs
what is A bankers’ acceptance?
debt securities used to finance foreign trade
what are Mortgage bonds?
what are Debentures?
bond issuers that are not secured by collateral
A debenture is an unsecured debt instrument. It is backed solely by the issuer’s full faith, credit, and promise to pay
what is Collateral trust certificate?
backed by underlying assets or collateral (securities of another company.)
what is Subordinated debenture?
have a secondary claim to assets in the event of bankruptcy (behind straight debentures)
What is an Income bond?
no legal obligation to make interest payments and will only pay interest when the corporation earns enough income to do so
how often do GNMA pass-through certificates pay out interest and principal
Monthly
An investor that owns an 8% bond would receive how much on each interest payment date?
The investor will receive $80 per year ($1,000 x .08), but only $40 per payment since the bond pays interest semiannually.
When interest rates increase, bond prices in the secondary market decrease
because new bonds will be issued at a higher interest rate, so the existing bonds (with the lower interest rates) are less attractive and drop in price
The net asset value of a bond fund will rise and fall based on interest rates.
comparing Treasury bills and Treasury receipts
Both securities are sold at a discount and pay interest at maturity
unqualified opinion, this means:
everything is legally in order and there are no problems with the issue
The maximum maturity for tax-exempt commercial paper is:
he maximum maturity is 270 days (9 months), and they are issued at a discount to par
U.S. government bonds are taxable at the federal level, but they are state tax exempt. Municipal bonds are exempt from federal tax, but subject to state tax, unless it is your state of residence, in which case, they will be tax exempt at the state level as well.
The relationship between prices and yields for outstanding corporate bonds when interest rates are changing is
A
Inverse
As yields rise, the prices of outstanding debt instruments will fall. As yields fall, the prices of outstanding debt instruments will rise. Therefore, the relationship is an inverse one
Who issues negotiable CDs?
Negotiable CDs are issued by banks.
If interest rates increase, the price of a bond will go down, making its current yield higher than the nominal yield.
Current yield will increase
If interest rates increase, the price of a bond will go down, making its current yield higher than the nominal yield.
Which T-bill is not auctioned weekly?
52 week
Which of the following statements regarding Eurodollars in not true
Eurodollars are registered with the SEC
