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Series 7 > Chapter 2 Debt Securities > Flashcards

Chapter 2 Debt Securities Flashcards

(72 cards)

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1
Q

Convertible bond price movement compared to stock

A

if a bond is convertible into common stock, the price of the bond will tend to move with the price of the stock. When the underlying stock increases the yield on the bond will decrease. (as bond prices increase bond yields decrease)

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2
Q

What would a company use to stabilize cash flow

A

Commercial Papers- this is unsecured short term corporate debt which has a maximum maturity date of 270 days

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3
Q

Bonds par value

A

$1000

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4
Q

Bond, coupon rate

A

Fixed rate percentage of par paid semi annually

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5
Q

Maturity Date

A

The date at which a bond comes due, The principal (par value) is generally repaid to the investor on the maturity date.

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6
Q

Series Bonds

A

Have different issue dates and usually the same maturity date. Used to fund different parts of a single project

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7
Q

Term Bonds

A

An entire issue of bonds that all have the same maturity date

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8
Q

Sinking Fund

A

Money will be set aside to repay the loan later. This is a provision of the stock and will increase the safety of paying it back therefore it will lower the yield (interest rate)

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9
Q

Serial Bonds

A

one issue date and multiple maturity dates

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10
Q

Balloon Maturity

A

a bond issue with a large amount of the issue that comes due at or near the final maturity date

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11
Q

Funded Debt

A

CORPORATE DEBT- must be due more that 1 year from issue date. Includes corporate bonds, notes and bank loans.
Does not include preferred stock, government bonds or municipal bonds

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12
Q

Registered Bonds

A

Bonds registered in the investor’s name and interest payment are sent directly to the investor by the corporation’s paying agent.
All bonds are currently issued as registered
Interest is paid directly to the investor
Principal sent directly to the owner at maturity

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13
Q

Bearer Bonds

A

Not registered and have coupons attached to the bond. To receive interest, investor must clip the coupon and present them to an authorized paying agent ( typically a bank). US bonds are no longer issued this way

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14
Q

Registered “as to Principal Only”

A

Investors name with coupons attached. Must present coupons to receive interest. US bonds are no longer issues in this form

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15
Q

Book Entry Form

A

Most bonds are held in this form
Ownership is represented electronically

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16
Q

Bond Ratings

A

AAA-highest rating
AA
A
BBB- lowest investment grade
BB- highest speculative grade
B
CCC
CC
C
DDD
DD- lowest rating

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17
Q

Bonds Ratings companies

A

Standard and Poor’s
Moody’s
Fitch

A.M. Best is not a bond rating agency (rates insurance companies)

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18
Q

Bond Maturities

A

Short term- 1-3 years
Medium term- 4-10 years
Long term- greater than 10 years

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19
Q

Accrued interest by type of bond

A

Corporate and Muni- 30 day calendar and 360 day year
Federal- calculated on actual days, 365 calendar days year

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20
Q

Coupon Rate

A

Fixed rate of interest that is paid to the investor based on the $1,000 bond value

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21
Q

Bond Yield

A

Takes into account the purchase price of the bond, interest rate and redemption value

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22
Q

Nominal Yield

A

Coupon or interest rate on the face of the bond

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23
Q

Current Yield Formula

A

Annual interest/market Price

This is a snap shot of gains right now

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24
Q

Yield to Maturity

A

Big Picture. This show the overall gain of the bond
takes into account purchase price, redemption value, coupon rate and time to maturity

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25
Change in yield of a bond, basis point
1 basis point is equal to 0.01%. a change of a 1% for a bond is 100 basis points
26
Short term bond characteristic
React quickly to interest rate changes but do not change as much. therefore they are considered safer and more stable
27
Long Term Bonds Characteristics
React slower to interest rate changes but will have a greater change. This causes them to carry more risk then short term bonds
28
Duration
is a measure of the sesitivity of a bond's market price to changes in interest rates. ie a bond with a duration of 5 will have a price movement of 5% for every 1% movement in interest rates
29
Bond Trading "M"
5M bonds would be 5 bonds or $5,000 worth of bonds not 5000 bonds each worth $1,000
30
Bond Quote example 6s of 28 @ 109
6% coupon rate maturity of 2028 selling at 1090
31
Bond Settlement date
is 2 business days after the trade date
32
Accrued Interest appears on both confirmations
Added to the amount the buyer pays Added to the amount the seller recieves
33
Accrued interest and basis
Accrued interest paid is not added to basis it is deducted from interest received on the years taxes that interest is next paid
34
Bondholder and owners
Bond are a debt interest so the bond holder is not considered an equity owner
35
Corporate Bond interest taxes
Fully taxable to federal, state and local level
36
Corporate bond trading
Most are traded over the counter
37
Corporate bonds- Leveraged buy outs
A takeover company borrows funds and uses the assets of the company being taken over as collateral
38
Holding Company
When a corporation owns enough voting rights of another that it can influence the companies policies, management and board of directors
39
Trust Indenture act of 1939
Requires all corporate bonds must specified the rights and duties of the issuer, underwriter, and investor. Also the issuer must appoint a trustee to represent and protect the bondholder. Act does not regulate: Federal Government issue Municipal issues Private placement Unit Investment Trusts (UITs)
40
Secured Bonds
Bonds secured by a guarantee or collateral of some sort
41
Mortgage Bonds
Secured bonds that a back by real property as collateral
42
Closed end Open end general mortgage bonds
Closed end- Can not be used as collateral for another loan unless the new loan has a lesser claim Open end- All Debts have an equal claim on the collateral General- A mortgage bond that pledges all mortgageable properties of a corporation as collateral but does not name a specific lot
43
Equipment Trust Certificate
Generally used by transportation companies (trains, airplanes, trucks) to purchase new equipment and uses the new property to secure the loan. Usually not callable, issued in serial form and rarely even default
44
Collateral Trust Certificate
Uses securities of another corporation that the issuer owns as collateral
45
Guaranteed Bonds
Bonds that are guaranteed by a company other than the company that is issuing them, typically a parent company
46
Parity Bonds
Bonds that have equal claims on assets as bonds that were previously issued. Similar to open end mortgage bond
47
Debentures
Debt obligation of a corporation backed only by the full faith and credit of the corporation itself and not by any specific asset of the corporation
48
Subordinated Debentures
holds a lesser or "junior" claim than other debentures
49
Fallen Angles bonds
Bonds that were originally issued as investment grade but have been downgraded to a junk bond rating
50
Zero Coupon Bonds
Bonds that sell at a large discount but do not pay semi-annual interest At maturity they pay 1 lump sum create "phantom interest that is taxed annually Used for investors seeking to accumulate capital are the most volatile of all fixed income securities
51
Zero Coupon bond example: ABC zr 27
ABC- is the corporation zr- is that it is a 0 coupon 27 - it matures in 2027
52
Callable bonds
A bond that is callable at the option the issuer. Not a positive to investors (not good for investors on a fixed income) The higher the coupon rate on the bond the more likely it will be called Bond and Preferred stock may be callable, common stock is NEVER callable
53
Call Protection
a time period in which bonds may not be called by the issuer
54
When a company calls a bond...
Bondholder recieves a call premimum plus the accrured interest The company's credit worthiness improves (less debt) debt to net worth ratio improves (since it decreases)
55
Prior to calling a bond, issuer must...
Give a notice of call that states the date the bond will be redeemed. The investor can then convert (if convertible), sell the bond, or wait for the redemption date.
56
Convertible Bond
Bonds that can converted to shares of the common stock at the option of the bondholder Not taxable until the common stock is sold
57
Parity Calculation
Par Value/Conversion price=Common shares produced Market price of bonds or preferred shares/common shares produced= parity of common stock OR Common Shares produced * mtk price of common shares= parity of bond or preferred stock Par for bond = $1,000 Par for preferred stock = $100
58
Refunding Bonds
The sale of a new issue of bonds used to pay off (retire) and outstanding issue of bonds Does not change capitalization since debt remains the same
59
Why refund bonds?
Sharpe decline on interest rates To pay of convertible bonds to reduce the prospective dilution effect on common stock if they were converted
60
Collateralized Mortgage Obligations (CMOs)
a bond that is secured b a pool of mortgage loans. These are a mortgage-backed security Historically has been a safe investment pays income on a monthly basis Often used by investors in a low tax bracket to supplement monthly income Considered a derivative security
61
Issuers of CMOs
Ginnie Mae Freddie Mac Fannie Mae FHA mortgage loans Conventional/private mortgage issuers NOT issued by Sally Mae
62
CMO Tranches
CMOs pay off 1 tranche at a time in order of maturity. Z-Bond is the final tranche of a CMO and recieves no cash until earlier tranches are paid in full CMO tranches that pay a variable interest rate are usually measured to the LIBOR CMOs trade over the counter with mark ups or mark down
63
CMO Risk Considerations
- Credit Risk- Historically low since they are guaranteed by US government sponsoring agencies and have a AAA rating - Interest rate/Market Risk- If rates decline CMO prices will increase, mortgages will be refinanced and prepayment will occur. If rates rise cmos with lower rates will be less desirable -Maturity risk- implied call risk- risk the principal will be returned earlier than anticipated. Extension risk- The maturity of the risk will be extended further then originally expected
64
CMO advertising
Must not contain comparison to CDs Must prominently display the final maturity date of the securities Must include a description of the initial issue tranche
65
Agency CMOs
CMOs guaranteed by Fannie Mae (FNMA), Freddie Mac (FHLMC) and Ginnie Mae(GNMA) Ginnie Mae are comprised of FHA and VA mortgages that are guaranteed against default
66
Collateralized Debt Obligations (CDOs)
Structured debt that is backed by a pool of assets (including mortgages). Generally traded by their average life rather then stated maturities
67
Money Market
High quality, short term (12 months or less) debt instrument. Can be treasury bill, CDs, Commercial paper, or Banker's acceptance
68
Treasury Bills
Most liquid of all money market instruments
69
Negotiable Certificates of Deposit (CDs)
Time deposits Guaranteed by commercial banks $100,000 minimum Usually trade +interest (interest is added on top of the sold certificate price Eurodollar CDs are used by banks outside the US but the interest and principal are paid in US dollars (Not all CDs are short term can be 3, 5, and 10 years as well)
70
Commercial Papers
Unsecured Promissory note issued at a discount Repaid from account receivables Maturity maximum of 270 days NOT FDIC INSURED
71
Bankers Acceptance
Used to finance foreign trade Least liquid of al money market instruments
72
Exchange risk
Is associated with foreign and sovereign debt instruments, not US or domestic debt issues

Series 7 (20 decks)

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