Debt Securities Flashcards
1
Q
Fill in the blank
Corporations, government entities, and municipal governments may issue ” “ as a way to raise capital.
A
debt securities
2
Q
Most debt securities have a par value of $1,000. Par is often referred to as _ or _.
A
principal, face value
3
Q
The date the investor receives the loan principal back is called
A
the maturity date
4
Q
When a bond’s entire principal matures at once, issuers may establish sinking fund account to retire bonds at maturity
A
term bond
5
Q
Serial bond
A
schedules portions of the principal to mature at intervals over a period of years until entire balance is repaid
6
Q
- combines elements of both serial and term maturities,
- issuer repays portion of bond’s principal before final maturity date,
- major portion of bond paid off at maturity date
A
balloon bond (serial and balloon maturity)
7
Q
True of Fales
Savings bonds do not trade in the secondary market.
A
True) Though savings bonds are a security, they are not traded on the secondary market and, are exempt from several securities laws.
8
Q
- also called stated yield or nominal yield
- represents the interest rate the issuer has agreed to pay the investor
- calculated as percentage x par value
A
coupon rate
9
Q
A bond with a 6% coupon rate would pay how much in interest each year?
A. $32
B. $600
C. $36
D. $60
A
D) A bond with a 6% coupon is paying $60 in interest each year (6% x $1,000 par value = $60)
10
Q
What must a buyer do if a bond is traded between coupon payments?
A
The buyer (new owner) must pay the seller (old owner) the amount of interest earned to date at the time of settlement.
11
Q
One point is
A
$10 (price)
12
Q
1% yield would equal
A
100 basis points
13
Q
Bond’s pay interest _.
A
semiannually
14
Q
OTC
A
All debt securities are quoted and traded over the counter (OTC).
15
Q
The difference between what a bond is purchsed for compared to the price for which it is sold.
A
the spread
Broker/Dealers make a living from the spread
16
Q
UPC mandates all months as _ day months
A
30-day months (360-day year)
17
Q
High quality debt maturing in less than a year is called a
A
money-market instrument; T-bills are considered the best money-market security available
18
Q
True or False
Treasuries (T-bills) are issued and sold at a discount.
A
True
19
Q
A BID at 2.50 and an ASK of 2 would most likely be for which type of bond?
A
Treasury because they are bought and sold at a discount.
BID price, $97.50; ASK price, $98.00
subtract the BID or ASK price from face value of $100
20
Q
- money market security used to facilitate foreign trade
- 270 day max maturity to be exempt from registration
- issued at a discount
A
Banker’s acceptance (BAs)
21
Q
Another term to indicate a seconday market (sell-able)
A
negotiable
22
Q
- type of money market instrument
- unsecured promissory note
- issued at discount
- 270 day max maturity to be exempt from registration
A
commericial paper
23
Q
This type of MM security is sold as a certificate of deposit (CD) with a minimum account balance of $100,000.
A
negotiable CDs (jumbo CDs)
24
Q
sovereign debt securities
A
- type of Foreign Debt Security
- issued by a national government
- safety dependent on nation’s economy
25
Eurobonds can best be described as
- Foreign corporate debt
- borrowed against and sold in Euros
- carries a Foreign currency risk
26
This type of foreign corporate debt is a US dollar-denominated Eurobond and carries no foreign currency risk.
Eurodollar bond
27
A 6% corporate bond trading on a 7% basis is trading
A) at a discount
B) at a premium
C) with a current yield above 7%
D) with a coupon rate below 6%
**A)** at a discount
*7% basis means the YTM is 7%. Since YTM is higher than the coupon rate of 6%, so the bond trades at a discount. Current yield must be between the coupon rate and the YTM. *
28
# Calculate the current yield
Ford Motor Company issued debentures at 8% of par. The current market value (CMV) is $1100.
* 8% of PAR is $80 **i.e.** *8% x $1000 = $80*
* $80 / $1100 = 7.3% CMV
29
Annual Interest/Current Market Value =
Current Yield
30
Buying a bond with a YTM the same as the coupon rate would be buying
A) at a discount
B) at a premium
C) at par
C) at par
31
When someone is buying a bond at a premium, you must quote _.
yield to call (YTC)
32
Name the three major credit rating agencies
- Fitch Ratings, Inc.
- Moody's Investors Service, Inc.
- Standard and Poor's Rating Service (S&P)
33
Standard & Poor's bond ratings from highest to lowest
AAA- highest capacity
AA- very strong
A- slightly more susceptible to adverse economic conditions
BBB- adequate, slightly speculative
| S&P investment grade (bank-grade) bond interpretations
34
Moody's bond ratings from highest to lowest
Aaa- highest capacity
Aa- very strong
A- slightly more susceptible to adverse economic conditions
Baa- adequate, slightly speculative
| Moody's investment grade (bank-grade) bond interpretations
35
bank-grade bonds (investment-grade)
- bonds rated in top four categories (BBB or Baa and higher)
- purchased by institutions (e.g. banks or insurance companies) and fiduciaries
- greater liquidity
- lower yield
36
- lower-grade bonds (BB or Ba or lower)
- higher risk of default
- considered speculative, fixed-income investment
High-yield bonds (junk bonds)
37
Short maturity and high coupon indicates
greater stability (less volatility)
38
Long maturity and low coupon indicates
greater volatility (less stability)
39
Annual coupon payment / market price =
Current Yield
40
What must a bondholder consider when calculating yield to maturity (YTM)?
YTM is the annualized return (interest payments) of a bond if held to maturity. If purchased at a discount, the investor makes money at maturity. If purchased at a premium, the investor will lose money at maturity.
41
A bond purchased at 110 and held to maturity
would pay $1000 (par) though the investor paid an $1100 premium. Total return is reduced by $100.
42
Feature that allows the issuer to redeem a bond BEFORE maturity
call feature (*callable*)
43
# Inverse Relationship of Price and Yield
coupon < CY < YTM < YTC
bond is trading at a DISCOUNT
44
# Inverse Relationship of Price and Yield
a bond trading at PAR
coupon = CY = YTM = YC
45
# Inverse Relationship of Price and Yield
coupon > CY > YTM > YTC
a bond trading at a **premium**
46
All US Treasury securities are issued in _ form.
*book-entry*
no physical securities exist and they settle T+1
47
An unsecured promissory note issued by a **bank** that can be traded in the secondary market is also known as
a negotiable CD
48
Commercial or prime paper
unsecured promissory note issued by a *corporation*
49
The issuance of stocks or bonds by corporations to raise new funds takes place in _
the capital market
50
ad valorem taxes
Ad valorem taxes are real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states).
51
- issued weekly by US treasury
- short-term debt obligations
Treasury bills (T-bills)
52
What does TIPS stand for in the context of US Treasury securities?
Treasury Inflation-Protected Securities
53
True or False: STRIPS are created by separating the interest payments from the principal of a Treasury bond.
True
54
Fill in the blank: TIPS provide investors with protection against _____ inflation.
rising
55
What is the primary benefit of investing in TIPS?
They provide a hedge against inflation.
56
Which of the following is a characteristic of STRIPS? A) They pay periodic interest B) They are sold at a discount C) They have a fixed interest rate
B) They are sold at a discount
57
Debt that has collateral, meaning that an asset of the corporation is pledged to secure the loan is considered
secured debt
58
The three most common types of *secured* debt
- mortgage bonds
- Equipment Trust Certificate
- collateral trust bonds
59
are backed by real estate that is owned by the corporation.
Mortgage Bonds
60
Equipment Trust Certificate
bonds secured by equipment the corporation uses in its operations. When referring to vehicles, you may see the term "rolling stock."
61
- backed by a portfolio of securities held in trust to secure the loan
- securities held in trust may be from any issuer but must be liquid (easily sold) and exceed the loan amount
- must have maturities as long as the bond or longer
Collateral Trust Bonds
62
Debentures, guaranteed bonds, income bonds, and subordinated bonds are all
types of of unsecured debt, based on the financial strength of the issuer
63
- most senior (highest priority) unsecured debt obligation
- another term for unsecured bond
Debentures
64
responsibility of the issuer but are further backed by a third party should the issuer default
Guaranteed Bonds
65
Income bonds
- also called *adjustment bonds*
- only make interest payments when the company has enough income and the board authorizes the payments
66
- often carry a higher coupon rate because of the additional risk
- below debentures in order of seniority
Subordinated Debt
67
List the order of liquidation from highest to lowest priority creditors.
Secured debtholders, unsecured debt (debentures) and general creditors, subordinated debt, preferred stockholders, common stockholders
68
- wages and taxes are often paid out at this level
- those the company owes money to as part of its operations (typically vendors and other suppliers)
Unsecured debt (debentures) and general creditors - second in order of liquidation
69
- issued by the U.S. Treasury
- are short-term debt obligations
- issued weekly with maturities of 4, 8, 13, and 26 weeks
- **all interest is paid at maturity**
- issued at a discount
Treasury Bills (T-Bills)
70
only Treasury securities issued without a stated interest rate
T-bills and STRIPS
71
used in market analysis as the standard for a risk-free rate of return
13-week (also called 91-day) T-bills
72
- intermediate-term direct debt of the federal government (2-10 year maturities)
- pay interest every six months (semi-annually)
- investor receives final semi-annual interest payment and par value at maturity
Treasury Notes (T-Notes)
73
What are characteristics of Treasury Bonds (T-Bonds)?
- have maturities greater than 10 years and up to 30 years,
- issued at par
- pay interest every six months (semi-annually)
74
Treasury Receipts can best be described as
- a type of bond created by BDs from U.S. T-notes and T-bonds
- sold as separate receipts against the principal and coupon payments
- provides investors with several maturities to choose from
- stripping process yields more profit for BDs than is offered by selling the original Treasury securities outright
75
Separate Trading of Registered Interest and Principal of Securities
- Treasury STRIPS are receipts created by the Treasury Department using T-Notes and T-Bonds
- separation of interest coupon from principal and trading is done by banks and BDs
- issued at discount
- considered a zero-coupon bond
76
- special type of Treasury security with a fixed coupon rate
- pays interest semiannually
- principal value adjusted every six months based on inflation
- interest payments will increase with the principal during periods of inflation or decrease during periods of deflation
- final principal payment will never be less than par ($1000)
Treasury Inflation-Protected Securities (TIPS)
77
* issued by state or local goverments, US territories, or other local authorities
* raises funds to support public works and construction projects, utilities, schools, and hospitals, etc.
* based on the issuer's financial strength and taxing authority
* interest is tax exempt at federal level
* settle T+1
Municipal Bonds
78
**True or False)** Municipal bonds typically pay interest semiannually (every six months).
True
79
General Obligation (GO) Municipal Bonds
- generate capital for infrastructure or property improvement
- principal and interest must be paid from taxes
- often require voter approval
- bonds issued by states are backed by income taxes, license fees, and sales taxes
- bonds issued by cities and counties are backed ad valorem, by license fees and other sources of income
80
- used to finance a municipal facility that generates sufficient income to pay the bond
- considered to be self-supporting debt
- not subject to statutory debt limits (no voting required)
- may be tied to the specific structure funded by the bond
Revenue Bonds
