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Series 7 > Chapter 2 - Corporate Bonds > Flashcards

Chapter 2 - Corporate Bonds Flashcards

1
Q

Why would a company issue bonds?

A

To raise working capital or fund capital expenditures.

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2
Q

Who are some of issuers of debt?

A

Corporations, US Government, Municipalities, US Territories

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3
Q

Explain Term, Serial, Balloon maturities.

A

Term is when the principal of the whole issue matures at once. Serial is when portions of the principal mature at different intervals. Balloon is when portions of principal mature over time then a big lump sum payment is made at the end.

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4
Q

What are some things a bond certificate would have on it?

A

Name, interest rate, payment date, maturity date, call features, principal amount, CUSIP…

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5
Q

What is a bearer bond?

A

The bond has no registration, and you must clip the coupons in order to redeem the interest.

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6
Q

For US Government Bonds which registration is used?

A

Book entry: no certificate is received, the transfer agent maintains records and the customer has a confirmation number.

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7
Q

If a customer wants interest payments received by mail which registration is required?

A

Fully registered or Book Entry

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8
Q

What is the pricing for corporate bonds, increments? Give an example.

A

Corporate bonds increase in 1/8 increments. 98 1/8 = 98 1/8% of $1000 = 981.25

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9
Q

What is the basis for ratings?

A

Financial stability, amount of debt, cashflow, history of repayment, asset protection, management

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10
Q

What is the cutoff for an investment grade bond, rating wise?

A

Anything below a BBB for S&P, or Baa for Moody’s

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11
Q

What is the relationship between yield and a bond’s rating?

A

Higher rating = lower yield

Lower rating = higher yield

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12
Q

From highest to lowest, what are the safest bonds and give some examples.

A

US Government - T-bills, notes, bonds, Series EE and HH
Government Agencies - GNMA, FNMA, FHLMC, FFCB
Municipals - GO’s and Revenue bonds
Corporate - Secured bonds, debentures, sub. deben. income bonds

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13
Q

What is a sinking fund?

A

Operated by the bonds trustee and is a place where they may save to retire a issue, buy more in the open market…

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14
Q

What is the formula for a call premium, give an example.

A

When an issuer calls a bond early, will usually give a premium. Call price - par = call premium. 103 - 100 = 3, $30

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15
Q

Why would an issuer call a bond early?

A

Refinance higher interest rate debt with a lower one. Replace short term with long term debt and vice versa.

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16
Q

What is refunding and prerefunding?

A

Raising money to call an issue.
Issuing a new set of bonds at a lower rate, and putting the proceeds into escrow until the other issue at the higher rate may be called.

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17
Q

What is a tender offer?

A

Issuer extends a offer for outstanding bonds at a premium price.

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18
Q

What is yield and how is it determined?

A

Expresses cash interest payments in relation to a bonds value. It is determined by credit quality, maturity, interest rates and if it’s callable.

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19
Q

What is the formula for current yield?

A

Current Yield = Coupon Payment/Market Price

20
Q

What is the current yield of a 6% bond trading at 800? What is this bond trading at?

A

$60/800 = 7.5%

A discount

21
Q

Rank yield highest to lowest for a discount and premium bond.

A 
Discount = YTC, YTM, CY, Nominal
Premium = Nominal, CY, YTM, YTC
22
Q

If the yield curve between corporate bonds and government bonds widen, what does that mean? If if narrows?

A

Widening is a recession and narrowing is an expansion

23
Q

How do long term rates move in relation to short term?

A

Long term maturities will tend to swing more than short term, also discounts move more than premiums

24
Q

If two bonds have the same maturity but different coupons, which one will move more?

A

The one with the lower coupon. Discounts move more than premiums.

25
Q

If two bonds have the same rate but different call dates, which one will move more with falling rates?

A

The one with most distant call date.

26
Q

What are the two types of corporate bonds? Give some examples

A

Secured backed by collateral - Mortgage bonds, collateral trust, equipment trust.
Unsecured not backed by collateral - Debentures and subordinated debentures

27
Q

What is the hierarchy of claims in a liquidation?

A

Unpaid wages, Taxes, Secured debt, Unsecured liabilities, Subordinate debt, Preferred stock, Common stock

28
Q

What are zeroes?

A

Zero Coupon Bonds which are sold at a deep discount. There is no semiannual interest payment. They can be volatile in changing rate environments. Taxes are due by the value accreted each year. No reinvestment risk though, locks in a return.

29
Q

What is a convertible bond and what are the advantages and disadvantages?

A

A bond that can be exchanged for common stock. The bonds are more marketable for issuer and have lower rates. Although once converted shareholder equity is diluted.

30
Q

What is the conversion price and conversion rate. If a bond has a conversion price of $40 what is the ratio and how many shares would a shareholder receive upon conversion?

A

Conversion price is stock that can be exchanged for shares. Conversion rate is the number of shares the bond can be converted too. $1000/$40 = 25 shares, 25:1 ratio

31
Q

What is equation for Parity Price of Stock and the Parity Price of the Convertible?

A

PP Stock = Market price of bond/Conversion rate

PP Convertible = Market price of stock * Conversion rate

32
Q

An issuer declares a stock dividend of 25%. At a conversion price of $25 how many shares would be received and what is the new conversion price?

A 
$1000/$25 = 40 shares, 40 * 1.25 = 50 shares
$1000/x = 50 shares, x = $20 conversion price
33
Q

Describe a T-bill.

A

A short term US government bond that is issued from 13 - 26 weeks at a discount from par and has a bid-ask in which the bid is higher than the ask. (higher bid translates to a lower dollar price, discount)

34
Q

Describe a T-note and T-bond.

A

Intermediate term bond from 2-10 yrs, pays interest every 6 months and traded and quoted in 32nds. T-bond is just like a note but longer term 10+ yrs.

35
Q

What is the difference between Treasury Receipts and Strips?

A

Both have the principal and interest stripped from the bond and sold off as separate components. But Strips are backed by the US government while the Receipts are not.

36
Q

What are TIPS?

A

Treasury Inflation Protection Security that has an adjusting principal base determined by the CPI and pays every 6 months.

37
Q

What are the agency issues and which one has backing by the government?

A

GNMA, FNMA, FHMLC, SLMA, Farm Credit. GNMA has the backing. Issued in $25k increments, reinvestment risk, and pass through certificates. All the agencies are taxable at all levels.

38
Q

On a new issue when does interest begin accruing? When/How does a buyer pay the seller interest owed?
What are the settlements for the different bonds and what are the accrued calculations for each?

A

On the dated date. The buyer will pay the seller accrued interest up to but not including the settlement date.
Corporations, Muni’s, and Agencies settle T+3, and are calculated on 360 days, 30 day months. US governments are next day settlement and are calculated on 365 days, actual months.

39
Q

An F & A Muni bond is traded on March 5th. How many days of accrued interest? What if the bond trades flat?

A

Feb = 30 days
March = 7 days
Total = 37 days accrued interest
The bond would trade without accrued interest.

40
Q

What are CMO’s?

A

Collaterlized Mort. Obligations. Type of security that is pooled from single family residences and structured in tranches by maturity date. Backed by GNMA and FNMA and are AAA rated. They pay principal and interest but the principal goes to one tranch at a time from shortest maturity to longest.

41
Q

What are PO’s and IO’s?

A

PO, principal only CMO, where investor will get principal payments and prepayments. These sell at a discount and values rise when rates drop and fall when rates rise. IO, interest only CMO, investor gets interest payments. Sells at a discount and values rise when rates rise, and fall when rates fall. Can do a hedge with IO.

42
Q

What are PAC’s and TAC’s?

A

Planned amortization class CMO that is retired 1st and has a targeted maturity date. They provide prepayment and extension risk protection. Changes in prepayments are deferred to support tranches. Targeted amortization class, transfers prepayment risk to support tranches but no extension risk.

43
Q

Is there a secondary market for US savings bonds? What are some types of them?

A

No secondary market. Series EE is issued at 50% face value with maturity of 30 yrs. Series HH pays interest every 6 months, these aren’t issued anymore. Series I has an inflation component built into it.

44
Q

What are some money market instruments?

A

Repurchase agreement, bankers acceptance, commercial paper, CD’s.

45
Q

List the interest rates in order from highest to lowest.

A

Prime rate, Call loan rate, Discount rate, Fed Funds rate

46
Q

What are Eurodollars and Euro bonds?

A

US dollars in banks which are outside of the US. Same with bonds.

Series 7 (16 decks)

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