3. Bonds

Question 0

PAR value of a Bond

Principle of a Bond

Answer 0

$1,000

vs. PAR of a Stock = $100

Question 1

Definition & characteristics of BONDS

Answer 1

Loans to Public Corporation, Federal Gov or a municipality
Different from common & preferred stock - Not ownership, but a debt obligation.
Classified as DEBT SECURITY
Investor = creditor who receives interest payments

Question 2

Coupon Rate =

Answer 2

*Interest rate of a bond
*fixed rate stated as a % of the par value of the bond
*interest on bonds is paid semi-annually (twice a year)
e.g. Coupon Rate = 8%
.08 x 1,000 = $80 - received in two $40 payments each year

Question 3

Point on a Bond

Answer 3

$10, .001% of Par ($1,000)

Point on a Stock = $1, 1% of Par ($100)

Question 4

Maturity Date

Answer 4

Date the Principle ($1,000) is repaid to the investor

Question 5

Three Bond trade levels

Answer 5

A Discount - under par value
Par - market price = actual par value ($1,000)
A Premium - Bond’s market price is more than par value

Question 6

Bond symbol “M” = ?

Answer 6

M is the Roman numeral for 1,000

5M = 5,000

Question 7

Bond Structures (how corporations may structure their bond debts)

Answer 7

Series Bonds - different issue dates, same term/maturity date
Term Bonds - entire issue has same maturity date
Sinking Fund - Money set aside to redeem a company’s bonds, debentures or preferred stock (insures capital available when a term arrives - Term Bonds)
Serial Bonds - 1 issue date with staggered maturity dates. interest costs to issuer go down over the life of the bonds
Funded Debt - Corporate Bond (not preferred stock, gov or muni bonds) due more than 1 year from issue date

Question 8

Bond issue systems

• Registered *Registered “as to Principal Only”
• Bearer *Book Entry Form

Answer 8

• Registered = in investor’s name, interest payments sent directly to investor
• Bearer - Not registered in investor’s name, redeemable interest coupons
• Registered “as to Principal Only” Registered in investor’s name with redeemable coupons
• Book Entry Form - electronic registration, covered online

Question 9

Current Yield on a Bond Formula

Answer 9

Current Yield = Annual Interest / Market Price = CY

An investor purchases a 9% bond @ 90. What is the current yield?
Bonds trading at a discount (Par = 1,000) yield will always be higher than coupon rate.
9% of Par ($1,000) = $90; Divided by the discount Par ($900) = $10

Question 10

Yield to Maturity (or Basis) Formula

Answer 10

Purchase Price
Redemption value
Coupon Rate
Time to Maturity

Question 11

Formula to calculate Corporate Bond’s dollar value

e.g. 102 3/8

Answer 11

(102 x 10) + (3 divided by 8 x 10) = 1,023.75

1020 3.75

Question 12

Formula for computing $$ dollar amount of a Bond’s accrued interest

Answer 12

(Principle x Rate x Time)
Divided by…
360

Question 13

Formula for calculating the Conversion Price for a convertible bond or preferred stock to Common Stock

Answer 13

Par Value
-----divided by-----
Common Shares Produced
             =
     Conversion Price