Volume 1- Chapter 6 Flashcards
What do fixed-income securities represent?
Debt of the entity that issues them.
What are the two main components of fixed-income securities?
- Promise to repay the maturity value
- Payment of interest at stated intervals or at maturity.
How are interest payments from fixed-income securities taxed?
As ordinary income.
List some types of fixed-income securities.
- Bonds
- Debentures
- Money market instruments
- Mortgages
- Preferred shares.
What is the rationale for issuing fixed-income securities by corporations and governments?
- To finance operations or growth
- To take advantage of financial leverage.
Why do governments borrow money?
When they spend more than they receive in tax revenue.
What is financial leverage?
Using borrowed funds to seek magnified percentage returns on an investment.
What is a bond?
A long-term, fixed-obligation debt security secured by physical assets.
What document outlines the details of a bond issue?
Trust deed.
What happens when a bond issuer defaults?
Bondholders can seize specified physical assets to recover their investment.
Define a debenture.
A type of bond secured by a general claim on residual assets, often referred to as an unsecured bond.
What is par value in relation to bonds?
The principal amount the bond issuer contracts to pay at maturity.
What is the coupon rate of a bond?
The interest rate paid by the bond issuer relative to the bond’s par value.
What is the maturity date of a bond?
The date at which a bond matures and the principal amount is paid back.
What is the term to maturity?
The time that remains before a bond matures.
How is the bond price determined?
Present discounted value of all future payments the bond issuer must pay.
What does it mean if a bond is trading at a premium?
The bond price is above par value.
What is yield to maturity?
The annual return on a bond that is held to maturity.
What are the three categories of bonds based on term to maturity?
- Short-term: more than 1 year but less than 5 years
- Medium-term: 5 to 10 years
- Long-term: greater than 10 years.
What is a money market security?
A special type of short-term fixed-income security generally with a term of one year or less.
What is liquidity in the context of bonds?
The ease with which bonds can be traded.
What are marketable bonds?
Bonds that have a ready market.
Fill in the blank: A bond’s coupon indicates the _______ the bondholder will receive.
income
True or False: Most bonds pay interest annually.
False