Chapter 5 Fixed-Income Securities

Question 1

Bond Basics

Bands represent what of an issuer ?

Answer 1

Bonds represent a loan or debt obligation of an issuer (the borrower)

• issuer is responsible for interest payments and repayment of principle at maturity (debt service)
• Bond holder is a creditor, not an owner
• Default occurs if interest or principal payments are missed

Question 2

Bond Basics - Form of Issuance
1 Bearer
2 Reg as to principal only
3. Fully Registered
4. Book Entry
Cert avail? Coupons?

Answer 2

Cert Avail? Coupons

1. Yes; Physical
2. Yes; Physical
3. Yes; Electronic/mail payment
4. No; Electronic/mail payment

Question 3

Bond
Premium means ____ par
Discount means _____par

Answer 3

Premium means at par

Discount means below par

Question 4

Bond

Par Value

Answer 4

Face value or principal

$1000

Question 5

Bond

Maturity or due date

Answer 5

• Quoted by mm/dd/yy

- Date for return of principal and last interest payment

Question 6

Bond

Interest Rate

Answer 6

• Coupon rate or nominal yield
• Fixed percentage
• Stated annually, paid semi-annually

Question 7

Bond can have

Long or short coupon issues

Answer 7

Long - more than 6 months

Short - less than 6 months

Question 8

Features of Bonds

Accrued Interest

• Interest is due on since ____
• The buyer pays the seller the market price plus the accrued interest

Answer 8

Interest is due on since the last interest payment

Question 9

Call Features for Bonds - Advantages to the Issuer

Answer 9

• In-Whole
• Partial (Lottery/Sinking Fund)
• Called bonds do not continue to receive interest

Question 10

Types of Corporate Bonds
Secured - backed by what?
Unsecured

Answer 10

Secured - Backed by some for of collateral

Unsecured - backed by issuers full faith and credit , some debentures may be convertible into shares of common stock

Question 11

What is a debenture

Answer 11

unsecured note

Question 12

Zero Coupon Bond and OID

Answer 12

Pays no periodic interest

• issued at deep discount, but matures at face value (par)
• Taxes paid on earnings reported but not received (phantom interest)
• Traded flat (without accrued interest)

OID Interest - Original Issue Discount

Question 13

Credit Ratings

1. Who pays for a bond to be rated?
2. What’s the concern?

Answer 13

1. Issuer

2. Risk of default

Question 14

Investment grade is

Answer 14

S&P/Fitch   
AAA
AA
A
BBB
Moddy's
Aaa
Aa
A
Baa

Question 15

Interest Rate Risk

When market interest rates change, the market price of a bond changes in the ____ direction

Answer 15

opposite direction

Question 16

When interest rate change which bonds Longest or Shortest have the largest price change?

Answer 16

Longest

Question 17

Bond Pricing

Bond prices are stated as ____

Answer 17

Percentages of par

1% or 1point for a bond: $10

Question 18

Fractional form 100
Decimal ___
Dollar ____

Answer 18

Fractional form 100
Decimal 100%
Dollar $1,000

Question 19

Pricing of U.S. Government Treasuries

How are T-Notes, T-Bonds and Agency Securities priced - as a percentage of what?

Answer 19

A percentage of par and fraction - 1/32

Question 20

Quotation - 87-16 means

Answer 20

Rewritten - 87 16/32
Decimal - 87.50%
Dollar price - $875.00

Question 21

Quotation - 106.28

Answer 21

Rewritten - 106 28/32
Decimal - 106.875
Dollar price - $1068.75

Question 22

Bond Yields

Nominal Yield means

Answer 22

Same as Coupon; fixed

Question 23

Bond Yields

Current Yield means

Answer 23

Annual Interest / Current Market Price

Question 24

Bond Yields

Yield to maturity or Basis

Answer 24

• Investor’s total overall yield

- Measured to bond’s maturity

Question 25

If a bond is callable the lower of Yield-to-Maturity or Yield-to-Call will be stated on the ______.

Answer 25

trade confirmation.

Question 26

Current Yield Calculation Nominal Yield is 8%, 9%, 6 1/2% Bond Price is $1,000, $1,125, $812.50 What is the calculation of current yield:

Answer 26

Calculation of current yield is: - 80/1000 = 8% - 90/1,125 = 8% - 65/812.50 = 8%

Question 27

Bonds selling at a discount use yield to ____

Answer 27

Yield to maturity

Question 28

Bonds selling at a premium use yield to ____

Answer 28

yield to call

Question 29

5-1 Par value of a bond is

Answer 29

- principal - face value - the amount the issuer agrees to pay the investor when the bond matures

Question 30

5-2 BCG Corp issued a corporate bond with a coupon rate of 8%. An investor who purchases $10,000 worth of the bond will receive an annual interest payment of:

Answer 30

$800

Question 31

5-3 Forms of Registered bonds are

Answer 31

1. Registered to principle only 2. Fully registered 3. book-entry

Question 32

5-4 If a bond is priced at below $1,000, the bond is trading at a ______.

Answer 32

discount

Question 33

5-5 CMOs are securities that are backed by _____.

Answer 33

Mortgages. CMO are Collateralized Mortgage Obligations

Question 34

5-6 If a corporation is forced to liquidate its assets, which debt holder is paid last?

Answer 34

Common stock

Question 35

5-7 A zero-Coupon bond would be an appropriate investment for which of the following investors?

Answer 35

Someone who needs a lump sum in 10 years to pay off the balloon mortgage on his house.

Question 36

5-8 A bond is purchased that is callable at 105 in five years. How much will the investor receive if the bond is called after five years?

Answer 36

$1,050

Question 37

5-9 Rating organization sis the primarily concerned with the risk of:

Answer 37

Default

Question 38

5-10 An investor recently invested $100K in bonds. What will happen to the value of his portfolio if interest rates increase?

Answer 38

It will decrease