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SIE > Chapter 3 Bond Basics and Terminology > Flashcards

Chapter 3 Bond Basics and Terminology Flashcards

1
Q

What is a bond?

A

is essentially a loan between the lender/creditor, or investor, and the borrower, or bond issuer. Issuer borrows money for a fixed rate. (Fixed income security). Par Value = $1,000

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2
Q

What is Principal?

A

The amount of money borrowed.

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3
Q

Whats a Term Bond Structure?

A

Every bond has the same Interest Rate and Maturity Date

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4
Q

What is serial bond Structure?

A

Has varying maturities and interest rates

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5
Q

What is balloon Maturity?

A

Large amount of bonds maturing on a specific date

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6
Q

What is a Series bond?

A

Has varying dates of issuance all maturing on the same date

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7
Q

What is Coupon Rate?

A
  • Bonds annual interest rate.
  • Interest is paid semiannually
  • Also known as nominal Yield
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8
Q

What is a Zero-Coupon Bond?

A
  • Bonds that have no coupon and is discounted from par.
  • Interest is paid at maturity and taxed annually.
    -Taxed as ordinary income each year
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9
Q

What is accreted value?

A
  • The value at any given time of a debt instrument that accrues interest over multiple years.
  • (Basically asking what the current accumulated value is)
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10
Q

What is redemption?

A

It is the repayment of principal on the maturity date
(The principal amount + last semiannual payment)

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11
Q

What is considered short term?

A

A debt instrument with a maturity date of 2 years or less is considered short term.

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12
Q

What is considered intermediate term?

A

A maturity of 2-10 years.

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13
Q

What is early retirement?

A

Paid off the bond before stated maturity. This typically happens during periods of falling interest.

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14
Q

What happens when bonds are traded in the secondary market?

A

The change of ownership is recorded with the transfer agent.

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15
Q

When do Corporate and Municipal bonds accrue interest?

A

30/360 year

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16
Q

When does government bonds accrue interest?

A

Actual day/365

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17
Q

What is interest Rate Risk?

A

Investors with bonds that have coupons below the current rate must offer their bonds at a reduced price.

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18
Q

What is volatility?

A

Refers to the frequency and degree of interest rate and credit rating changes.
Most volatile bonds are deep discounted long-term bonds and zero coupon bonds.

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19
Q

What is bond quote?

A

1 point =$10
To calculate price multiple quote by $10.
Decimals are multiplied by $10

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20
Q

What does ABC 8s 2025 was at 105 mean?

A

8% bond maturing in 2025 was traded at 105 ($1,050)

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21
Q

What is default risk?

A

The perceived risk of nonpayment or default.

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22
Q

What are the two most popular bond rating agencies?

A

Standard and poor’s and Moody’s

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23
Q

What is an Investment Grade Bond?

A

Very strong capacity to meets financial commitments

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24
Q

What is a Speculative Bond?

A

The issuer has an adequate vulnerable capacity to meet its financial commitments

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25
Q

What are bond Yields?

A

The benefit received from holding a bond
100 basis points represents a 1% interest rate change

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26
Q

What is Nominal Yield?

A
  • is the stated return, or coupon, rate that is printed on the face of the bond.
  • 10% nominal yield pays $100 in interest per year (10% of $1,000).
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27
Q

What is the current Yield?

A
  • The annual return the investor can expect to receive from a bond
  • Current Yield = Annual Interest ÷ Current Market Price
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28
Q

What is Yield to maturity?

A
  • Computes the investor’s expected annual return over the life of the investment
  • Yield to Maturity= (Annual Interest + Annualized Gain OR - Annualized Loss)/ (Purchase Price + Redemption Price)/2
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29
Q

What is Yield to Call (YTC)

A

Computes the expected return when called back

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30
Q

What relationship does yields and Prices have with each other?

A

They have an inverse relationship
Par= (CY,YTM, YTC)
Premium < (CY, YTM, YTC)
Discount > (CY, YTM, YTC)

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31
Q

What are Corporate Bonds?

A

Debt instruments issued by a corporation and sold to investors
- Source of capital

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32
Q

What is a Trust Indenture?

A
  • Legal agreement outlining the terms of the loan between the corporation and the bondholders.
  • Compliance with Trust Indenture Act of 1939 (anything over $5,000,000 and 1 year or greater)
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33
Q

What are Secure Bonds?

A

Backed by specific collateral to reduce the risks associated with lending

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34
Q

What are Mortgage Bonds?

A

Bonds backed by corps real estate

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35
Q

What are Equipment Trust Certificates?

A

Secured bonds backed by equipment

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36
Q

What is a Collateral Trust Certificate?

A

bonds backed by another company.

37
Q

What are Debentures?

A

Unsecured Bond
- Backed by the general creditworthiness and reputation of the issuer

38
Q

What are Subordinated Debentures?

A

Unsecured Bonds
- They have a secondary claim in the event of bankruptcy. Have high interest rates

39
Q

What is a Guarantee Bonds?

A

Unsecured Bond
- Backed by the promise of the issuer + parent company.

40
Q

What’s a High Yield Bonds?

A

Unsecured Speculative Bond
- Just has a high default risk.

41
Q

Whats an Income Bond?

A

Unsecured Bond
- Corp coming out of bankruptcy. Not obligated to make interest payments

42
Q

Whats a convertible bond?

A

Bonds that can convert to common stock.
Typically accept a lower coupon on the bond during conversion

43
Q

What’s a Call Feature?

A
  • Allows the issuer to end the contract early
  • Call protection between the issue date and the first potential call.
  • Must be at or above face value
44
Q

Whats a Call Risk?

A
  • Interest rates in the market goes down.
  • Bondholder might be forced to accept a lower coupon rate on a new investment
45
Q

Whats a Put Provision?

A

Allows the bondholder to sell the bond back to the issuer at par value on specific dates

46
Q

What is a Treasury Bill?

A

Short term debt securities with maturities of 1 year or less.
- Issued at discount
- Maturities of 4, 13, 26, or 52 weeks
- For conservative investors with short time horizons

47
Q

What a Treasury Note?

A

Government debt securities that mature in 2-10 years
- Pay semiannual interest income (federally taxable)

48
Q

Whats a Treasury Bond?

A

Government debt instruments with maturities greater that 10 years
- Pay Semiannual interest income (federally Taxable)

49
Q

Whats T-STRIPS?

A

Zero coupon instruments backed by the U.S. government.
-Maturity up to 30 years
- Earn phantom or imputed interest

50
Q

What are Treasury Receipts (T-Receipts)

A

Zero coupon security backed by the interest and principal of treasury securities
- Not of direct obligation o the U.S. Government

51
Q

What is a Treasury Inflation Protected Securities (TIPS)

A

Security where the principal amount is adjusted every 6 months based on CPI
- Pay Semiannual interest

52
Q

What are Dutch Auctions?

A

Institutions that use a competitive bid system.
- The last yield that is accepted will be the yield that all accepted bids are awarded

53
Q

What is the Government National Mortgage Association?

A
  • part of the department of housing and Urban Development that originate mortgages.
    -Only MBS that is guaranteed by the full faith, credit, and taxing power of the U.S. Government
54
Q

What does the Federal National Mortgage Association do (Fannie Mae)?

A

Issues mortgage-backed pass through securities comprised of conventional and insured mortgages from other agencies
- Not backed by the U.S. Government just sponsored

55
Q

What does the Federal Home Loan Mortgage Corporation ( Freddie Mac)?

A

Issue mortgage backed pass-through securities comprised of residential mortgages issued by financial institutions

56
Q

What is Collateralized Mortgage Obligations?

A

A pool of mortgages that divides interest and principal into separate classes called tranches
- Designed to provide the investor with greater predictability of interest and principal payments
-Based on Average Life method.

57
Q

What’s an asset-backed security?

A

Form of pooled fixed-income investment.
- Auto loans, credit card debt, and consumer loans
- Typically only for institutional investors
- To take advantage of high rates

58
Q

What is Prepayment Risk?

A

The principal is paid back by lenders ahead of schedule.
- Occurs when interest rates decline in the market

59
Q

What is Extension Risk?

A

A risk that the principal will be paid back at a slower rate.
-When Interest Rates in the market rise

60
Q

What are Municipal Bonds?

A

Debt instruments issued by state and local governments. Federally tax exempt - through the opinion of legal counsel
- Interest rate may appear lower. The next interest payment occurs 6 months later.
- In the book-entry form
- Pay semiannual interest

61
Q

What are General Obligation Bonds?

A

Bonds are issued by a state, counties, cities, and other political subdivisions. Voter approval is required.
- Backed by the issuer
- Considered very safe (the issuer can increase taxes to help repay the bondholders)

62
Q

What are Revenue Bonds?

A

Finance specific projects (Toll roads, parking stuct.) Does a feasibility study to determine if funding is enough.
-Self-supporting (revenue generated from the project)

63
Q

What are Double-Barreled Bonds?

A

Bond backed by two or more sources of repayment.
- Revenues generated from an income-producing facility and the full taxing power of the municipality.

64
Q

What are Moral Obligation Bonds?

A

Bonds requested to local government entities to help pay debt services

65
Q

What re Industrial Development Revenue bonds?

A

Private activity bonds and are a type of revenue bond issued to finance the construction of a commercial facility that will be leased to a private entity.
-Could be subject to federal income tax

66
Q

What is Variable Rate Securities?

A

Long term debt issues with interest rates that are reset at specific intervals or after specific event has occurred
- Maturities are more than 10 Years
- Less sensitive to price movements

67
Q

What are Variable Rate Demand Obligations (VRDO)?

A

Long Term municipal bonds that are created with market funds and tied to money market rates.
- Has floating rates and reset
- $100,000 minimum

68
Q

What are Auction Rate Securities?

A

Long-term investments that offer liquidity on specified interest reset dates.
- Reset on every 7, 14, 28, 35 days
- Hold at market
- lowest bid wins and establishes the current rate
- Liquidity Risk

69
Q

What are Municipal Notes?

A

Short term debt obligations.
- Maturities from 3 months to 3 years

70
Q

Tax Anticipation Notes (TANS)

A

Issued with the expectation of future tax revenues from property taxes.

71
Q

Revenue Anticipation Notes (RANs)

A

Used in anticipation of receiving actual revenue from an enterprise at a future date

72
Q

Tax and Revenue Anticipation Notes (TRANs)

A

A single issue that expects a future stream of a combination of taxes and revenues to pay off the notes

73
Q

Bond Anticipation Notes (BANs)

A

Issued ahead of an expected long-term bond issue

74
Q

Tax Exempt commercial Paper

A

A promissory note issued by municipalities, backed by a line of credit from a commercial bank.
- Matures in 270 days

75
Q

Tax Equivalent Yield

A

To compare the after-tax return of the different bonds
Tax Equivalent Yield= Interest on Municipal Bond / (100% - Tax Bracket)
Net Yield = Interest on Corporate Bond x (100% - Tax Bracket)

76
Q

What is EMMA (Electronic Municipal Market Access System)?

A

Website to find valuable information

77
Q

Municipal Advisor

A

Will act in a fiduciary capacity for the state or local government, assisting in developing the plan of finance and the related transaction
- Provides advice, selection of underwriter, and underwriter compensation

78
Q

Bond Counsel

A

Group of lawyers to provide an objective legal opinion on bonds.

79
Q

Underwriter

A

Primary role is the distribution of securities to investors through an arms length arrangement with the issuer.
- Obtains funds and provides them to issuers at closing.
-

80
Q

Underwriting Counsel

A

Represents the underwriter in the offering with legal needs.

81
Q

Underwriting Syndicate

A

Under managing underwriter, additional underwriters are contracted to assist in the distribution of the bonds to investors.

82
Q

Competitive Bid

A

The new Issue of bonds goes up for bid among underwriters, and the lowest interest rate bid wins.

83
Q

Money Market Securities

A

Short term debt instruments maturing in one year or less.
- Highly liquid

84
Q

Commercial Paper

A

short term debt instrument issued by a corporation to help finance accounts receivable and seasonal inventory overages.
- matures 270 days
- Minimum face value of $50,000

85
Q

Bankers Acceptances

A

debt securities used to finance foreign trade.
-Sell debt to bank as a letter of credit

86
Q

Negotiable Certificates of Deposit (CD)

A
  • This is to attract deposits outside of client bases
  • Minimum denomination is $100,000
  • Maturity is less than 1 year
87
Q

Eurodollars

A

U.S. Dollars deposited in banks outside the United States

88
Q

Which of the following allow bondholders to sell their bonds back to the issuer at par value prior to maturity?

A

Bonds with put provisions

SIE (12 decks)

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