Vol 2 Chapter 2 & 3

Question 1

Issues related to debt securities (Bond) (3)

Answer 1

Risks faced by debt investors
The term structured of interest rates
Long-term debt Rating

Question 2

Risks faced by debt investors (3)

Answer 2

· Interest Rate Risk: risk of capital loss due to the fluctuations in interest rate

	· Default Risk: risk of the issuer will not pay the principal)/interest, or fail to fulfill other terms

	· Liquidity Risk: risk that an issue cannot be sold at a price close to the current price

Question 3

The term structured of interest rates (3)

Answer 3

· Expectation hypothesis (increase/decrease)
Determined by expectations concerning future interest rate

	· Liquidity hypothesis (increase)
		Risk-averse investors prefer to invest in short-term instruments because it has a lower interest risk than long-term bonds

	· Market Segmentation hypothesis (no necessary relationship)
		Individuals and institutions prefer to lead short because this increases their flexibility to meet unexpected contingencies

Question 4

Long-term debt Rating

Answer 4

· Highest: AAA
	· High Quality: AA+, AA, AA-
	· Strong PMT Capacity: A+, A, A-
	· Adequate PMT Capacity: BBB+, BBB, BBB-
	· Likely to fulfill obligations: BB+
	· Uncertainty: BB, BB-
	· High-Risk: B+, B, B-
	· Poor Standing (maybe in default): CCC+, CCC, CCC-
	· Extremely Poor Prospects: CC, C

Question 5

Bond Markets Characteristics

Answer 5

usually semi-annual PMT, coupon rate determined the PMT amount, fixed-income security, has long maturity

Question 6

Convertible and exchangeable bonds

Answer 6

· Convertible: bond can be convert for equity in the issuer of the bond (within the same firm)
· Exchangeable: bond can be exchange for equity of a firm other than the issuer (not within the same firm)

Question 7

How bonds are traded in secondary market

Answer 7

Mostly in the over-the-counter market (trade with one another through telephone, email and electronic trading systems)

Question 8

Call feature, (2) types

Answer 8

Allows issuer to buy back bonds at a set price within certain time period
1 ) call the entire amount of bond
2 ) call only part of the bond

Question 9

U.S Municipal bonds(3)

Answer 9

any state issues bond or any entity created by a state

		General obligation bonds
			· Issuer will do what is necessary to repay the bonds

		Revenue bonds
			· Interest and principal are contingent on having revenues from a specific revenue source

		Serial bonds
			· Portion of the bonds mature each year

Question 10

Global Bond Market(4)

Answer 10

· Global offerings: offering its bonds to more than one country simultaneously

	· Yankee Bonds: foreigners issued bonds in the U.S.

	· Samurai Bonds: foreigners issue bonds in Japan, using Japanese investment banker, and denominated in JPY

	· Eurobonds: bonds underwritten by an international investment banking syndicate

Question 11

Use of Auctions in Connections with debt securities

Answer 11

Issuance of securities

Dutch Auction