Flashcards in Chpt 2 Debt Deck (41):
What are 3 types of bond maturity structures?
Term Maturity “Term Bond”: principal of the whole issue matures at once.
Serial Maturity “Serial Bond Issue”: portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.
Balloon Maturity: Issuer repays part of the principal before maturity but, pays off the major portion of the bond at maturity
What form must a bond be in for an investor to receive interest and principal payments by mail?
Bonds must be fully registered or in book-entry form.
If one point equals $10 (i.e. $1000 x 1%), one basis point equals?
1000 x .0001 = $0.10
Rating services like Standard & Poor’s (S&P) and Moody’s, evaluate the credit quality of which type of bonds?
corporate and municipal bonds
What valuations does Standard & Poor’s (S&P) and Moody’s use for their ratings?
S&P; bond either falls within top (+) or bottom (-) of a category (i.e. AA+ or A-)
Moody’s; numerical qualifiers to their categories (i.e. Aa1 or Baa2) - lower the number the higher the rating within the category.
Below which S&P and Moody rating would a bond be considered speculative?
BBB / Baa
What is the safest type of debt security?
US Government Securities (i.e. Treasury bills, notes, bonds, and saving bonds)
What is the riskiest type of debt security?
Corporate Debt Security
Liquidity is interchangeable with what other term?
Do highly rate issuers establish sinking funds?
No, lower rated issuers do to make their issues more marketable.
When do issuers call bonds?
Calls occur when interest rates are declining.
Investors who purchase callable bonds face what types of investment risk?
Call risk; risk that bonds will be called and the investor will lose the stream of income from the bond. Reinvestment risk; if interest rates are down when the call takes place, what likelihood does the investor have of investing the principal received at a comparable rate?
How much interest does a bond receive once called?
bonds do not pay interest after they have been called
Define Refunding Bonds.
Raising money to call a bond – issuer sells a new bond to generate funds to retire an existing bond approaching maturity.
When does pre-refunding occur? What does it lock in?
When there is a call protection. The issuer cannot legally call the bonds until a future date, but if interest rates are low, a low rate can be locked in by issuing the new bonds in advance of the call date.
Are prefunded bonds risky?
No, they cannot get any safer (AAA).
Funds from a pre-funded bond is escrowed into what type of security?
Putable bonds are commonly found in what type of bond?
Once putable, what type of risk if the investor protected against?
market risk (interest rate risk) as the bonds, at that point, will not trade much below the put price, which is par.
What equation is used to find Current Yield (CY)?
Current Yield = annual interest / Market price
Describe the relationship between Coupon Yield and Current Yield during premium, par, and discount.
When bonds are at par; coupon and CY are equal. When bonds are at premium; CY < Coupon. When bonds are at discount; CY > coupon
Answer the following:
If a bond has a YTC < CY, it is trading at
If a bond has YTM and CY that are equal, bond is trading at
If a bond has a YTM < YTC, it is trading at
If a bond has YTM > coupon, it is trading at
Rank yields from highest to lowest for Premium.
Rank yields from highest to lowest for Discount.
An economic expansion is reflect with which type of Yield Curve? Do interest rates decrease?
Normal "Positive" Yield Curve
No, it predicts interest rates will rise
Are long term interest rates higher or lower than short term rates on the Inverted "Negative" Yield Curve?
What is expected if the Yield Curve spread between corporate bonds and government bonds is widening?
Recession - Investors have chosen the safety of government bonds over higher corporate yields, which occurs when the economy slows down.
What is expected if the Yield Curve spread between corporate bonds and government bonds is narrowing?
Economic expansion - investors are willing to take risks. They will sell government bonds to buy higher-yielding corporates.
As interest rates change, long-term bonds move more in ____ than short-term.
If two discount bonds have the same time to maturity, which will appreciate the most if rates fall?
The bond trading at the deeper discount (i.e. the one with the lower coupon).
If two callable bonds have the same time to maturity, which will appreciate the most if rates fall?
The bond with the most distant call date
What are three secured bonds?
Collateral Trust Bond
Equipment Trust Certificate
What are two classifications of unsecured bonds?
Do Income Bonds pay interest?
No, they only pay face value.
Do Zero-Coupon Bonds pay tax?
Yes, investor’s owe income tax each year on the amount by which the bonds have accreted
Choose the security that has no reinvestment risk.
Zero-Coupon Bond because with no interest payments to reinvest, the investor has no reinvestment risk. Furthermore, because there is no reinvestment risk, buying a zero is the only way to lock in a rate of return.
What is a trust indenture?
legal a contract between the issuer and the trustee for the benefit of the bondholders
Corporate bonds trade on which platform?
NYSE and OTC
Provide the equation for how to find the conversion price, conversion ratio, parity price of common stock, and parity price of convertible bond.
Conversion Price = Par Value / # shares
Conversion Ratio (“# shares”) = Bond par value / Conversion price per share
Parity price of Common Stock = [Market price of bond / Conversion ratio (# of shares)]
Parity price of Convertible Bond = Market price of common x conversion ratio
What is the equation for calculating the new conversion price when a stock dividend is received?
(Conversion price) / (100% + % increase) = new conversion price