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Ser 7 > Ch 3 - BOND > Flashcards

Ch 3 - BOND Flashcards

(58 cards)

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1
Q

Par value

A

Known as a bond’s “face value”
Typically $1,000 for bonds
Typical sale price for new issue bonds
Bond interest rates based on par
Stays fixed for the life of the bond

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2
Q

Interest rate (coupon)

A

Represents annual interest paid to bondholders
Based on the bond’s par value
Largely dependent on market interest rates at the time of issuance

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3
Q

Interest payments

A

Legal obligation of the issuer
Typically made semi-annually

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4
Q

Bearer bonds

A

Owned by whoever physically possesses them
No longer issued in the US

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5
Q

Book-entry bonds

A

Ownership tracked electronically by a transfer agent
All modern securities issued in this format

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6
Q

Zero coupon bonds

A

Do not make regular interest payments
Issued at discount and mature at par
Longer maturities = deeper discounts

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7
Q

Short-term maturities

A

Safer than long-term bonds
Lower yields

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8
Q

Money markets

A

Debt securities with one year or less to maturity

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9
Q

Long-term maturities

A

Higher yields

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10
Q

Secured bonds

A

Collateral backs the bond
Safer investments vs. unsecured bonds

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11
Q

Unsecured bonds

A

Also known as full faith and credit bonds
No collateral backing
Riskier investments vs. secured bonds

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12
Q

Call feature

A

Allows issuers to end a bond before maturity
Require the payment of accrued interest, par, plus any call premium
Typically utilized when interest rates fall

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13
Q

Call risk

A

Occurs when a bond is called in an unfavorable environment
Typically results in reinvestments at lower rates
Type of reinvestment risk

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14
Q

Tender offer

A

Formal offer to buy a security from current investors

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15
Q

Put feature

A

Allows bondholders to end a bond before maturity
If exercised, the issuer must pay accrued interest plus par to the bondholder
Generally utilized when interest rates rise

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16
Q

Term issuance

A

All bonds issued and mature on the same day

Typical issuers:
-Corporations
-US government

Type of quote:
-Price quotes
-Dollar quotes
-Percentage of par quotes
-Term quotes

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17
Q

Serial issuance

A

All bonds are issued on the same day, but mature on different days

Typical issuers:
-Municipalities

Type of quote:
-Yield quotes
-Basis quotes
-Serial quotes

*bonds are issued with a balloon maturity，a type of serial, 哑铃，开始后最后多mature，中间很少量

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18
Q

Series issuance

A

Bonds are issued on different days, but all mature on the same day

Typical issues:
-Construction-related projects

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19
Q

Basis points

A

Formal measurement of percent
1 basis point = 0.01%
100 basis points = 1%

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20
Q

Firm commitment underwritings

A

Underwriter keeps unsold securities
Riskier for underwriters
Larger fees for underwriters

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21
Q

Best effort commitment underwritings

A

Issuer keeps unsold securities
Riskier for the issuer
Smaller fees for underwriters

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22
Q

Price quote example

A

Bond trading at 95

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23
Q

Yield quote example

A

Bond trading at a 6% yield

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24
Q

Call price tend to set ceilings for __________ of the bond

Study These Flashcards
A

market price

(knowing can be called at x, hard to sell more than the call price, cuz can be called anytime

25
issuers likely to call bond that are
-highest in interst rate -longest to maturity
26
Bond transactions
Initially sold in the primary market Trade in the secondary market
27
Bond market prices
nfluenced primarily by Interest rates Interest rates up, market prices down Interest rates down, market prices up Discount = market prices below par ($1,000) Premium = market prices above par ($1,000)
28
US Government bond trades (Settles)
Settle one business day after the trade (T+1) Settle through the Federal Funds system
29
Municipal and corporate bond trades (Settles)
Settle one business day after the trade (T+1) Settle through the Clearing House system
30
Accrued interest
Paid by the buyer to the seller during a bond transaction Interest accrues up to, but not including the settlement date
31
30/360 method
Assumes 30 days in each month “counted over” Utilized for corporate & municipal bonds
32
Actual/365 method
Counts actual days in months Utilized for US Government bonds
33
Price volatility
Measures how fast bond prices move when interest rates change Bonds with the most price volatility: -Long maturities -Low coupons Bonds with low price volatility: -Short maturities -High coupons
34
Duration
Measures how fast bond prices move when interest rates change Measures the amount of time necessary to recoup the original cost （purchase cost / coupon = years take to recoup） Bonds with longer duration: -Long maturities -Low coupons Bonds with shorter duration: -Short maturities -High coupons Zero coupon bonds do not pay interest until the very end of the bond, therefore it will take the entire length of the bond for the investor to recoup their original investment. Or, another way of saying a zero coupon bond’s duration is equal to its maturity.
35
Nominal yield
= Annual income / Par Measures the interest paid annually to investor Never changes over the life of the bond Also known as: Coupon Interest rate Stated rate ​
36
Current yield
CY= Annual income / Market price ​ Measures overall rate of return based on the current market price Discount bonds CY > coupon Premium bonds CY < coupon
37
Yield to call (YTC)
Measures overall rate of return if the bond is held until called If a bond is not callable, YTC does not exist. Essentially, we’re assuming the bond will be called as soon as it’s eligible. Discount bonds YTC > coupon Premium bonds YTC < coupon Remember, this investor is earning a discount of $200 over the life of the bond. If the bond is held to maturity, it will take the investor 10 years to earn the $200 discount. If the bond is called in 5 years, the customer earns the $200 5 years earlier than expected, which increases their annualized rate of return.
38
Yield to maturity (YTM)
Measures overall rate of return if the bond is held to maturity Discount bonds YTM > coupon Premium bonds YTM < coupon
39
Discount bond yield relationships
Current yield, YTM, and YTC are higher than the coupon Order of all yields (lowest to highest) -Nominal yield (coupon) -Current yield -Yield to Maturity (YTM) -Yield to Call (YTC)
40
Premium bond yield relationships
Current yield, YTM, and YTC are lower than the coupon Order of all yields (lowest to highest) -Yield to call (YTC) -Yield to maturity (YTM) -Current yield -Nominal yield (coupon)
41
Par bond yield relationships
All yields are the same N CY ytM ytC
42
Yield to worst
Lower of YTM or YTC provided in callable bond quotes Discount bonds = YTM is quoted Premium bonds = YTC is quoted When Non-callable bond, there is no YTC so always disclose YTM
43
YTC calculating factors
-annual coupon -annuilized discount/premium to call -call premium (if any) -bond market price -redemeption value at call date -# of years till called needed to calculate annualized discount/premium YTC many maturity related info = useless
43
basis
= YTM
44
"6s bond”
coupon = 6%
45
Bond benefits
Primary benefit is interest income Interest payments are legal obligations of the issuer Capital appreciation may occur, especially if interest rates fall Convertible bonds have most capital appreciation potential
46
Bond's Risks - Interest rate risk
Interest rates rise, forcing bond market prices down Most susceptible bonds: -Long maturities -Low coupons Avoided by variable rate bonds
47
Bond's Risks - Purchasing power (inflation) risk
Prices of goods and services rise, forcing bond prices down Typically results in higher interest rates due to Federal Reserve actions Avoided by short-term securities
48
Bond's Risks - Default (credit) risk
Issuer unable to make required interest and/or principal payments
49
Bond's Risks -Liquidity (marketability) risk
Security is difficult to sell or requires a large discount to sell
50
Bond's Risks -Legislative risk
New domestic law or regulation negatively affects a security
51
Bond's Risks -Political risk
Foreign government instability negatively affects a security
52
Bond's Risks -Reinvestment risk
Market returns reinvested at lower rates Occurs when interest rates fall High coupon bonds are most susceptible Avoided by zero coupon bonds
53
Bond's Risks -call risk
Bond called when interest rates fall The worst form of reinvestment risk
54
Bond ratings
Only consider default risk Three bond rating organizations: -Standard & Poors (S&P) -Moody’s -Fitch Investment grade bonds: -BBB or above -Low default risk Speculative (junk) grade bonds: -BB or below -High default risk
55
Bond typical investors
Seeking income Generally older, risk-averse (conservative)
56
Bond ladder strategy
Investing in bonds with spread-out maturities Includes bonds of all maturities Provides most maturity diversification
57
Bond barbell strategy
Investing in short and long-term bonds No intermediate-term bonds Provides benefits of short and long-term bonds

Ser 7 (16 decks)

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