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SIE > Chapter 2 Definitions > Flashcards

Chapter 2 Definitions Flashcards

(111 cards)

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1
Q

As an alternative to issuing stock to raise capital, issuers can also sell ______

A

Bonds

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2
Q

Unlike stock, bonds and fixed-income securities represent a loan to a _______, not equity

A

Borrower

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3
Q

Bond

A

Represents a loan to a borrower in reutrn for payment of interest and principal to the lender

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4
Q

Refunding

A

The process by which an issuer refinances, selling cheaper bonds to replace callable outstanding bonds in an environment in which interest rates are DECLINING

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5
Q

YTM

A

Yield to maturity

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6
Q

Yield to maturity

A

Accounts for not only the interest payments received by the investor, but also the difference between their purchase price and the amount of principal received at maturity

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7
Q

What is the most widely quoted rate of return on a bond?

A

Yield to maturity

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8
Q

Interest rate risk

A

Risk that as interest rates rise, bond prices will decrease

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9
Q

Accrued interest

A

Interest that is paid by the buyer of a bond to the seller when a bond is traded between coupon dates

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10
Q

Bond issuers engage in debt financing as they are _________________

A

Borrowing money from investors

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11
Q

When buying bonds investors are promised a return of the ______ and ________

A

Principal, interest

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12
Q

Bondholders have a higher claim on assets than _________ in the event of a bankruptcy or liquidation

A

Shareholders

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13
Q

Fixed-income securities

A

Bonds and other securities that pay a regular income stream to investors

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14
Q

Bonds today are issued in ________ form instead of _____ form

A

Registered, bearer

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15
Q

What does it mean for a bond to be issued in registered form rather than bearer form?

A

That the name of the owner(s) of the bond is recorded with the issuer or a transfer agent

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16
Q

What is the most common method of tracking bond ownership?

A

Book-entry form

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17
Q

How does book-entry form work?

A

The investor’s ownership is recorded electronically by a central depository

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18
Q

How does registered form work?

A

The ownership is recorded by the issuer

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19
Q

What is the difference between book-entry and fully registered bonds?

A

Book entry: ownership is recorded by a central depository
Registered: ownership is recorded by the issuer

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20
Q

Par value is also known as ______ or _________

A

Face value, principal

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21
Q

What does par value mean?

A

The amount of money a bondholder will receive at maturity

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22
Q

For exam purposes, always assume a par value of ________ for bonds unless told otherwise

A

1000

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23
Q

Is par value the same as the market price of the bond?

A

No

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24
Q

Market Price

A

Price of the bond paid by investors in secondary trading

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25
Does market price fluctuate? If so what causes it?
In response to a number of factors, primarily changing interest rates
26
Bond quotation states ___________
The price at which a bond is trading
27
Bond quotes are typically expressed as a percentage of their ____________
Par value
28
A bond that is trading at 120 which is 120% of its par value or _______
1,200
29
A bond quote of above 100 means the bond is trading at a ________ to par
Premium
30
A bond quote of below 100 means the bond is trading at a __________ to par
Discount
31
For bonds with par value of $1000, when converting the quote to a price simply multiply by ____
10
32
Bonds are typically quoted in 2 ways:
Percentage of par value & YTM
33
YTM takes into account 3 things:
Bonds current price, coupon rate, and time to maturity
34
Bond quotes can also include fractions! Corporate & Muni bonds can include _____
1/8ths
35
Bond quotes can also include fractions! Gov bonds can include _____
1/32nds
36
Coupon
Payment bondholders receive as interest
37
The coupon rate is also referred to as ______
Nominal yield
38
The coupon is usually paid on the ____ of th emonth, but if the number 15 is after is then it would be paid on the ______ of the month instead
1sts, 15th
39
When a bond matures, investors receive the principal plus _______
The final semiannual coupon payment
40
If a bond is issued with a coupon rate that remains the same until maturity, it is called a ________
Fixed rate bond
41
Are all bonds issued with fixed coupons?
No, issuers sometimes choose offer bonds that pay a variable rate of return (floating rate bonds)!
42
What is a stipulation of floating rate bonds?
The rate that the issuer pays to bondholders varies based on a specific benchmark, such as the Treasury bill rate
43
T or F: For floating rate bonds, the coupon rate moves alongside the Treasury Bill rate
True
44
Zero-coupon bonds
Pay no interest during life of the bonds
45
Are zero coupon bonds bought at a premium or a discount from par value?
Discount (and its deep)
46
For a zero coupon bond what does the difference between the discounted price and the maturity value represent?
The interest the investor receives from the bond
47
Zero coupon bonds are usually long term with maturities of ____ or more years
10
48
Because zero coupon bonds pay no interest until maturity, their _____ fluctuate more than those of other types of bonds in the secondary market
Prices
49
T or F: For zero coupon bonds, investors may still have to pay federal, state, and local income tax on the imputed/phantom interest that accrues each year
True
50
What is the major driver of bond prices?
Interest rates
51
The relationship between rates and prices is _____
Inverse
52
How many basis points are in one percentage point?
100bps = 1%
53
Maturity date
The future date on which principal is returned to bondholders
54
A bond that matures in one year is much (more/less) predictable than a bond that matures in 30 years
More
55
Due to greater uncertainty over the long term, long-term bonds generally pay ____ interest than short-term bonds
More
56
A long-term bond will fluctuate in price ____ than a short-term bond as interest rates change
More
57
As a bond reaches maturity its price will move towards ______
Par
58
Bond issuers with longer maturities may have a sinking fund provision. What does that mean?
The issuer must regularly set aside money in a special account called a sinking fund for the redemption of bonds before maturity
59
Callable bond
Issuer has the right to redeem it prior to its maturity date
60
When a bond is called interest payments will _____
Stop
61
When is a company likely to call a bond? Why?
If it is paying a higher coupon than current market interest rates. The company can then issue new bonds at a lower interest rate, saving money on the coupon payments
62
When will an issuer call a bond?
When interest rates are declining
63
If an issuer choose to call a bond because of declining interest rates, bondholders will receive 3 things:
Pay value, their final semiannual coupon payment & (if applicable) a call premium
64
Are callable bonds safer or riskier than non-callable bonds?
Riskier because you never know when they might get called
65
Who does a call feature benefit?
The issuer
66
The rate of a callable bond is ____ than non-callable bond
Higher
67
Some bonds can be sold with __________ which is a period of time from the date of issue during which the bond cannot be called
Call protection
68
Most ______ and _______ bonds with maturities over 10 years are callable
Corporate and municipal
69
Bonds issued by the federal government are _______
Not callable
70
Some bonds have a _______ which gives investors the right to demand early repayment of principal if some predetermined event occurs, this protecting investors
Put feature
71
Because put features are beneficial to investors, they pay ______ interest than similar straight or non-puttable bonds
Less
72
Current yield
Bond's return based on its current market price
73
What is the equation for current yield?
CY = annual interest/market price
74
Stating the bond has a YTM of 9.5% , what are the 3 ways people may say that?
Trading on a 9.5 basis, Trading at 9.5%, yielding 9.5%
75
When a bond is callable what becomes the most important yield calculation?
Yield to call
76
Yield to call
Determines the investors yield if the bon dis called on the first possible call date rather than held until maturity
77
Bond trading at premium rank CY, NY, YTM, YTC from greatest to least
NY, CY, YTM, YTC
78
Bond trading at par rank CY, NY, YTM, YTC from greatest to least
All equal
79
Bond trading at premium rank CY, NY, YTM, YTC from greatest to least
YTC, YTM, CY, NY
80
If a bond is purchased with a YTM greater than the coupon, the bond was purchased at a ________
Discount
81
Interest rate risk
Risk that an investment's vale will change as a result of change in interest rates
82
What does interest rate risk affect more directly: value of stocks or value of bonds?
Value of bonds
83
A bond with a ________ maturity and a ______ coupon will have greater interest rate risk for the investor
Longer, zero
84
Duration
Measures how sensitive a bond is to changing interest rates
85
Bonds with longer duration are ____ sensitive to changing interest rates
More
86
Do zero coupon bonds have reinvestment risk?
No because they do not pay a coupon so there is no interest to reinvest
87
Inflationary/purchasing power risk
Risk that an investor's returns will be adversely impacted because of inflation
88
What type of products are susceptible to inflationary risk and why?
Products that deliver a fixed rate of return such as bonds or preferred stock, are susceptible because their interest payments remain constant while the cost of goods and services continues to rise
89
Credit Risk
Degree of risk associated with the issuers ability to make interest payments or repay the principal
90
Non investment grade bonds are also called _____
Junk bonds or high yield bonds
91
What type of bonds have the lowest default risk and the lowest returns?
Government bonds
92
What type of bonds have greater credit risk and pay more interest than government bonds?
Corporate bonds
93
What is the key difference btwn Moodys & S and P investment ratings?
Moody's has numbers
94
What the S&P worst but still investment grade?
BBB-
95
What the Moodys worst but still investment grade?
Baa3
96
For corporate, municipal, and agency bonds, a year is assumed to have _____ days with _____ days in each month
360, 30
97
For T notes and T-bonds, a year is assumed to have ______ days with ______ months
365, actual-day
98
For corporate bonds, municipal bonds, and treasuries, regular way settlement is ____, which is ____ business day after the trade date
T+1, 1
99
For corporate bonds, municipal bonds, and treasuries, cash settlement is the same day as ______
The trade date
100
For new issuances that have no prior interest payment date the calculation starts with the ______
Dated date
101
Dated date
The date the issuer identifies as the date interest will first be paid
102
Bonds that are currently in default or are issued as zero-coupon securities trade _____
Flat
103
When an investor receives accrued interest, it is taxed for them as interest income based on _________
Their ordinary income tax rate, which is the rate they pay on their salary
104
What is the accrued interest formula?
AI = ((Par value)(interest rate)(number of days))/360
105
When a bond is purchased for a discount, the cost basis must be ________
Accreted
106
Accretion
The cost basis of the bond must be adjusted upward toward par each year so that maturity the investor's cost basis will equal par of $1000
107
Cost Basis
The value of an asset for tax purposes
108
How to calculate accretion?
Discount off par / Number of years until maturity
109
When a bond is purchased for a premium the cost basis must be ______
Amortized
110
Amortization
The cost basis will be adjusted downward each year so that at maturity the investor's cost basis will equal par of $1000
111
How to calculate amortization?
Premium / Years to maturity

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