Bonds Flashcards
(124 cards)
1
Q
What does a bond represent?
A
The issuer’s indebtedness.
2
Q
What is the document that states the terms of a bond?
A
The bond’s indenture.
3
Q
What is another name for the indenture?
A
Deed of trust.
4
Q
What is the coupon rate?
A
The fixed annual interest rate for a bond.
5
Q
What is the typical duration for long-term debt?
A
A minimum of five years, often 20-30 years.
6
Q
What is traded in the money market?
A
Short-term loanable funds in the form of securities and loans.
7
Q
What is the maturity date of money market instruments?
A
One year or less, usually less than six months.
8
Q
How are money market instruments generally issued?
A
At a discount.
9
Q
True or False: Money market instruments pay interest.
A
False.
10
Q
What do buyers of money market instruments receive at maturity?
A
The principal amount.
11
Q
Who are the primary purchasers of money market securities?
A
Institutions such as banks, insurance companies, and money market mutual funds.
12
Q
What is the relationship between interest rates and the price of debt securities?
A
They fluctuate inversely.
13
Q
What happens to interest payments when market prices fluctuate?
A
Interest payments stay the same.
14
Q
What is the role of the indenture in bonds?
A
Describes the legal conditions of the bond.
15
Q
What is the function of a paying agent?
A
To transmit payments of interest and principal to investors.
16
Q
What does a quote of 100 for a bond represent?
A
Selling at 100% of its par value, or $1,000.
17
Q
What is a trustee in the context of debt securities?
A
A financial institution that represents the investors.
18
Q
What is the difference between secured and unsecured debt securities?
A
Secured has specific assets as collateral; unsecured does not.
19
Q
What is a callable bond?
A
A bond that can be redeemed by the issuer before maturity.
20
Q
What is call protection?
A
The number of years before the issuer may exercise the call provision.
21
Q
Fill in the blank: The difference between the price paid for a money market instrument and the maturity value is considered _______.
A
interest.
22
Q
True or False: Most bonds pay interest monthly.
A
False.
23
Q
What is accrued interest?
A
Interest that has accumulated since the last payment date.
24
Q
What happens when a bond is sold before the interest payment date?
A
The buyer pays the seller the amount of accrued interest.
25
What is the typical payment frequency for bond interest?
Semiannually.
26
What do issuing companies do when they have surplus funds?
They may call in a portion of the bonds.
27
28
What is the safest money market security?
U.S. Treasury Bills (T-bills)
## Footnote
T-bills are offered at various maturities like 4, 8, 13, 26, and 52 weeks.
29
What is the maximum maturity period for T-bills?
52 weeks
## Footnote
T-bills can have maturities that change but are never longer than 52 weeks.
30
How are T-bills issued?
At a discount from the face value
## Footnote
T-bills are considered risk-free investments.
31
What is Commercial Paper (CP)?
Short-term, unsecured paper issued by corporations
## Footnote
CP is primarily sold in blocks of $100,000 to raise working capital.
32
What is the typical maturity range for Commercial Paper?
One to 270 days
## Footnote
Most CP maturities are within 90 days.
33
What does a Negotiable Certificate of Deposit (CD) allow?
Transferability before maturity
## Footnote
Unlike regular CDs, there is no prepayment penalty for negotiable CDs.
34
What is the minimum size for a Negotiable CD?
$100,000
## Footnote
These are also referred to as jumbo CDs.
35
What distinguishes Brokered CDs from regular bank-issued CDs?
Higher fees and longer holding periods
## Footnote
Brokered CDs may not be covered by FDIC insurance.
36
What is a Bankers' Acceptance (BA)?
A short-term time draft with a specified payment date drawn on a bank
## Footnote
Commonly used in international trade.
37
What does the bank do when it accepts a Bankers' Acceptance?
Stamps 'accepted' on the draft
## Footnote
This makes the instrument marketable.
38
What is a Repurchase Agreement (Repo)?
Sale of securities with an agreement to repurchase them at a higher price
## Footnote
The difference represents the interest earned.
39
What is a Reverse Repo?
Purchase of securities with an agreement to resell them at a higher price
## Footnote
The purchaser initiates the agreement.
40
What does 'sovereign debt' refer to?
Securities issued by national governments
## Footnote
In the U.S., Treasury securities are an example.
41
What is a Eurobond?
Any long-term debt instrument issued outside the country of the currency in which it is denominated
## Footnote
Example: A Swiss company issuing bonds in British pounds.
42
What is a Eurodollar Bond?
A U.S. dollar-denominated Eurobond
## Footnote
These are issued outside the U.S. and paid in U.S. dollars.
43
True or False: Eurodollar bonds and Eurobonds are the same.
False
## Footnote
Eurodollar bonds pay in U.S. dollars; Eurobonds pay in foreign currency.
44
What is the primary source of return for debt securities?
The income from the interest payments
45
What is the nominal yield?
The interest rate on a bond shown as a percentage of the par value
46
How do you compute the annual interest payments in dollars?
Multiply the nominal yield by the face amount of the bond ($1,000 unless stated otherwise)
47
What is the annual payment for a bond with a 5% coupon rate?
$50 per year
48
What is the annual payment for a bond with an 8% nominal yield?
$80 per year
49
What is the annual payment for a bond with a coupon of 13.5%?
$135 per year
50
What is the par value of all bonds for exam purposes?
$1,000
51
Are interest payments on bonds paid annually or semiannually?
Semiannually (every six months)
52
True or False: A bond paying 6% semiannually means two payments of $60 per year.
False
53
What is current yield (CY)?
The annual interest in dollars divided by the current market price
54
How is the current yield calculated?
current yield = annual interest ÷ current market price
55
What happens to the current yield when a bond is bought at a discount?
The current yield increases
56
What happens to the current yield when a bond is bought at a premium?
The current yield decreases
57
If a bond is selling at a premium, what can be said about its yield relative to the coupon rate?
The yield will be less than the coupon rate
58
If a bond is selling at a discount, what can be said about its yield relative to the coupon rate?
The yield will be greater than the coupon rate
59
What is the yield to maturity (YTM)?
The total return an investor can expect if the bond is held until maturity
60
What does an investor know about a bond purchased at a discount at maturity?
They will receive the par value, which is more than their purchase price
61
What does an investor know about a bond purchased at a premium at maturity?
They will receive the par value, which is less than their purchase price
62
What is a zero-coupon bond?
A bond that does not pay periodic interest and is sold at a discount
63
How is the yield to call (YTC) calculated?
It is the rate of return from the purchase date to the call date
64
What does it indicate if a bond has a YTC lower than its CY?
The bond is trading at a premium
65
What does it indicate if a bond has a YTM and CY that are equal?
The bond is trading at par
66
What does it indicate if a bond has a YTM less than its YTC?
The bond is trading at a discount
67
What happens to bond prices when interest rates rise?
Bond prices fall
68
What happens to bond prices when interest rates fall?
Bond prices rise
69
What is the relationship between coupon rate and duration?
The higher the coupon rate, the shorter the duration
70
What is the general rule regarding duration and interest rate risk?
Long-duration debt securities have greater interest rate risk
71
How can the current yield of a common stock be calculated?
By dividing the current dividend by the current price of the stock
72
What is the yield ranking from lowest to highest for bonds trading at a discount?
* Nominal
* YTC
* CY
* YTM
73
What is the yield ranking from lowest to highest for bonds trading at a premium?
* YTM
* CY
* YTC
* Nominal
74
What does duration measure in the context of debt securities?
The time it takes for cash flow (interest payments) to repay the invested principal
## Footnote
Duration is influenced by the coupon rate and maturity of the bond.
75
How does the coupon rate affect the duration of a bond?
Higher coupon rate results in shorter duration; lower coupon rate results in longer duration
## Footnote
This is based on the principle of interest payments and their reinvestment.
76
What is the relationship between duration and market price movement?
Longer duration leads to greater market price movement and vice versa
## Footnote
This implies that long-duration debt securities have greater interest rate risk.
77
What is a coupon rate?
The stated interest rate paid on a bond
## Footnote
Example: A bond with a 5% coupon pays $50 annually on a $1,000 face value.
78
What is a zero-coupon bond?
A bond that pays 0% interest and is issued at a discount to par value
## Footnote
Investors receive the face value at maturity, with the difference considered 'rent' for the borrowed money.
79
What is the duration of a zero-coupon bond compared to its maturity?
The duration is always equal to its length to maturity
## Footnote
This means no interest payments are received until maturity.
80
How does the duration of an interest-paying bond compare to its maturity?
The duration is always shorter than the time to its maturity
## Footnote
This is due to the reinvestment of interest payments.
81
What factors are involved in the computation of bond duration?
Interest rate and maturity date
## Footnote
The bond with the highest coupon rate will have the shortest duration.
82
What happens if the maturity dates of two bonds are similar?
The bond paying the highest coupon rate will have the shortest duration
## Footnote
Conversely, the bond with the lowest coupon rate will have the longest duration.
83
What are the general characteristics of duration?
* Lower coupon rate = longer duration
* Higher coupon rate = shorter duration
* Longer maturity = longer duration
* Duration of zero-coupon bond = maturity
## Footnote
These characteristics help in understanding interest rate risk associated with bonds.
84
What are alternative investments commonly referred to as?
Alts
## Footnote
This term encompasses various non-traditional investment products.
85
What is the primary characteristic of structured products?
They are created to meet the needs of a specific investor
## Footnote
Structured products include complex financial instruments like ETNs and leveraged ETFs.
86
What is a key difference between standard investments and alternative investments?
Standard investments are easier to comprehend, while alternative investments are complex and not easy to understand.
87
What factors should suitability determinations for alternative investments consider?
Each customer's objectives, circumstances, and sophistication.
88
What are equity-linked notes (ELNs)?
Debt instruments where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index.
89
What are the unique risks associated with Equity-Linked Notes (ELNs)?
* Credit risk
* Market risk
* Liquidity risk
* Call, early redemption, and acceleration risk
* Conflicts of interest
90
True or False: Equity-linked notes are equity securities.
False
## Footnote
ELNs are debt securities, not equity.
91
What is private placement debt?
Money loaned on a private basis, not registered with any regulatory body.
92
What is a common characteristic of borrowers for private placement debt?
They are often companies at an intermediate point in their development.
93
What does mezzanine debt refer to?
Debt issued by companies that have already taken on significant senior debt.
94
What is a potential benefit of mezzanine debt for companies?
Access to additional capital with relatively higher flexibility.
95
What are some risks associated with alternative investments?
* Lack of regulation
* Low transparency
* Low liquidity
* High fees
* Lack of historical data
96
Who are typically the investors willing to take risks in alternative investments?
Institutions or highly sophisticated (and wealthy) individuals.
97
What is the primary purpose of bond ratings?
To assess the safety and quality of debt securities.
98
Name three major bond rating firms.
* Standard and Poor's (S&P) Rating Service
* Moody's Investors Service, Inc.
* Fitch Ratings, Inc.
99
According to Standard & Poor's, what rating indicates bonds of highest quality?
AAA
100
What rating from Moody's corresponds to bonds of high quality?
Aa
101
Fill in the blank: Bonds rated BBB or Baa and higher are referred to as _______.
investment grade
102
What characterizes high-yield bonds?
Lower-grade bonds with higher risk of default.
103
What is the relationship between bond ratings and yield?
Higher ratings typically mean lower yields.
104
True or False: All bonds are rated by rating agencies.
False
105
What is the lowest rating category according to Standard & Poor's?
D
106
What does a rating of CCC indicate about a bond?
Bonds in poor standing that may be defaulted.
107
What do plus (+) and minus (−) signs indicate in bond ratings?
Relative strength within a rating category.
108
What is the highest rating category in Moody's system?
Aaa
109
List the four highest grades of bonds according to Standard & Poor's.
* AAA
* AA
* A
* BBB
110
What rating does a bond receive if it is classified as speculative by Moody's?
Ba
111
Fill in the blank: The risk/reward concept suggests that higher risk requires a greater _______ for the lender.
reward
112
What are the short-term municipal note ratings used by Moody's?
* MIG-1
* MIG-2
* MIG-3
* MIG-4
113
What rating indicates a speculative short-term municipal note according to Moody's?
SG
114
What is the purpose of money market ratings?
To measure the quality of short-term debt instruments.
115
What does the 'B' rating signify in Standard & Poor's rating system?
Bonds that lack characteristics of a desirable investment.
116
What does the term 'junk bonds' refer to?
Lower-grade bonds also known as high-yield bonds.
117
What does a rating of C indicate for a bond?
Income bonds on which no interest is being paid.
118
Fill in the blank: Bonds rated below BBB are typically considered _______.
speculative
119
What does a rating of Baa indicate according to Moody's?
Bonds of medium grade that are neither highly protected nor poorly secured.
120
True or False: The fact that a bond is unrated indicates it is of poor quality.
False
121
What is the lowest rating according to Moody's?
C
122
What do the ratings of SP-1, SP-2, and SP-3 refer to?
Short-term municipal note ratings by S&P.
123
What rating category does a bond with a risk of default fall into according to S&P?
BB
124
What is the significance of a mortgage bond in relation to its safety?
Not necessarily safer than any debenture.
