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Flashcards in debt securities Deck (91):
1

what is the bond yield order?

-nominal (coupon) yield
-current yield
-yield to maturity
-yield to call

2

interest on debt securities is paid how often?

semi annually

3

one point =

$10

4

100 basis points =

1%

5

if interest rates go up, price go..

down

6

if interest rates go down, prices go..

up

7

coupon yield formula:
Ex. Bond pays $60 annual interest, what is the coupon yield?

annual interest / par value
$60 / $1,000 = 6% coupon yield

8

current yield formula:
Ex. Bond trading at $1,200 pays $60 annual interest, what is the current yield?

annual interest / current market value
$60 / $1,200 = 5% current yield

9

basis / yield refers to =

yield to maturity

10

describe a price bond quote

1 bond point = 1% of par = 10$

11

describe a yield bond quote

1 basis point = .01 of yield

12

calculate price:
bond trading @ 92

92 = 92% of par = .92(1,000) = $920

13

calculate yield:
bond trading to yield 3.70

.01(3.70) = .037, 3.7%

14

4% on a 4.50 basis (discount or premium?)

discount

15

7% on a 4.50 basis (discount or premium?)

premium

16

definition of a callable bond

bond issued that issuer can buy back as of a specified date prior to maturity at a specified price

17

issuer will call bonds when..

issuer expects current interest rates to fall

18

callable bonds allows issuer to..

lower their cost of borrowing

19

callable bonds are advantages to the...

issuer

20

describe the effects of callable bonds on investors

-usually higher yields
-reinvestment risk (investor has lower rate to reinvest money when bonds are called)
-limits appreciation

21

describe term maturity of a bond

entire issues mature on same date

22

describe serial maturity of a bond

issue matures over a period of years

23

describe balloon maturity of a bond

small repayments initially and larger repayment at maturity

24

investors buy bonds looking for..

steady streams of income

25

describe convertible bonds

bonds that the investor can convert into common shares of stock

26

calculate conversion ratio:
bond convertible @ $40

par / conversion price
$1,000 / $40 = 25 share conversion ratio

27

calculate parity price of common:
bond trading @ $1,100
conversion ratio = 25 shares

market price of bond / conversion ratio
$1,100 / 25 shares = $44 parity price of common

28

calculate parity price of bond:
bond has 25 share conversion ratio
common trading @ $44

conversion ratio x common stock price
25 shares x $44 = $1,100 bond parity price

29

corporate and municipal bonds calculate accrued interest based on..

-30 day months / 360 day year
-regular way settlement (t+3)
-count up to but do not include settlement date

30

government securities calculate accrued interest based on..

-actual day months (365 day year)
-regular way settlement (t+1)
-count up to but do not include settlement date

31

what kind of bonds trade flat?

-zero coupon bonds
-bonds in default
-income bonds (adjustment bonds)

32

describe volatility in regards to long-term and short-term bonds given a change in interest rate

long term bond prices are more volatile than short term bond prices, given a change in interest rate

33

describe a normal yield curve

the longer the time of the bond, the higher the yield
-slopes up

34

describe an inverted yield curve

the longer the time of the bond, the lower the yield
-slopes down

35

when is a yield curve inverted?

when money is tight and interest rates are high

36

describe eurodollar deposits

-us dollars invested in banks outside of US
-usually higher risk/yield

37

describe eurobonds

-issued outside of us and not in us dollars
-issued in bearer form
-currency risk for us investors

38

descrive eurodollar bonds

-any issuer except the us govt, payable in us dollars
-issued in bearer form
-no currency risk

39

2 types of corporate debt securities

-secured
-unsecured

40

what are the different types of secured bonds?

-mortgage bonds
-collateral trust bonds
-equipment trust certificate

41

what are the different types of unsecured bonds?

-debentures
-subordinated debentures
-guaranteed bonds
-income (adjustment) bonds

42

describe mortgage bonds

bonds backed by real estate

43

describe collateral trust bonds

backed by other securities the issuer owns

44

describe equipment trust certificates

backed by equipment used in the issuers business

45

describe debentures

backed by issuer full faith and credit

46

describe subordinated debentures

paid last of all debt if issuer defaults

47

describe guaranteed bonds

bond guaranteed by a third party (parent company)

48

describe income bonds

bonds that only pays interest if company is profitable

49

what is the liquidation priority

-wages
-taxes
-secured bonds
-debentures and general creditors
-subordinated debentures
-preferred stock
-common stock

50

describe a sinking fund

corporation issues bond and money is put into trust in a bank to cover debt.
-automatically guarantees a AAA rating

51

what are sinking funds used for?

-redeem bonds at maturity
-call bonds
-tender offers (offer to buy back bond from investor)

52

what are the advantages of convertible bonds to issuer?

-marketability
-can sell at lower interest rate

53

what are the advantages of convertible bonds to investor?

-safety of debt
-appreciation potential

54

what are the negotiable us govt and agency securities

-t-bills
-notes and bonds
-zero coupon bonds

55

t-bills are quoted as a..

discount from par

56

how long is a t-bill maturity?

one year or less (4,13,26,52)

57

how are t-bills sold?

weekly auctions

58

calculate t-bill price:
t-bill quoted @ 1.3%

par - discount
100% - 1.3% = 98.7% or $987

59

how long is a t-note maturity?

2-10 years

60

t-notes and t-bonds are quoted as a..

percentage of par in 32nds

61

how long is a govt t-bond maturity?

more than 10 years

62

which is callable? t-bills, t-notes, t-bonds

t-bonds

63

calculate t-note or t-bond price:
t-note quoted @ 94.08

94% of par + 8/32nds
$940 + 1/4 point ($2.50) = $942.50

64

treasury receipts issued by?

-issued by broker dealers

65

treasury strips issued by?

-us treasury

66

EE and HH are?

savings bonds

67

describe TIPS

treasury inflation protection security
-savings bond with adjusted principal based on inflation

68

CMOs are sold by?

banks (financial institutions)

69

CMOs are backed by?

pool of mortgage securities associated with refinancing risk

70

how are CMOs paid and taxed?

-pay monthly checks (pass through certificates)
-taxed on all levels

71

describe the 3 types of CMO tranches

PAC-5 year maturities
TAC-10 year maturities
Z-tranche-more than 10 years

72

all tranches have what kind of risks?

-prepayment
-extension

73

buyer has to sign a ___ in order to purchase a CMO?

suitability statement (because they are so risky)

74

what defines money market securities?

-high quality debt
-one year or less maturity
-highly liquid

75

describe corporate-commercial paper

-unsecured
-270 day max maturity

76

describe banker's acceptances (BAs)

-facilitate foreign trade
-backed by letter of credit
-issued at a discount
-270 max maturity

77

describe federal farm credit systems

-provide agricultural financing
-backed by issuers
-interest exempt from state and local taxes

78

GNMA is backed by?

full faith and credit of US govt

79

how are investors of GNMAs paid?

monthly check that includes both principal and interest

80

FNMAs and FHLMCs are backed by?

issuing agencies

81

GNMAs are taxed on..

all levels

82

FNMAs and FHLMCs are taxed on..

all levels

83

GNMA, FNMA, and FHLMCs all have what kinds of risk?

-prepayment
-reinvestment

84

when do FNMAs and FHLMCs pay interest?

semi-annually

85

describe CDOs

pool of non-mortgage backed securities
-can be backed by bonds, auto loans, leases, credit card debt, etc.

86

describe the federal fund interest rate

the rate federal member banks charge each other for overnight loans

87

describe the prime interest rate

the rate large us money center banks charge their best corporate customers

88

describe the discount interest rate

the rate charged by the federal reserve board for loans to depository institutions

89

describe the broker call loan interest rate

the rate banks charge broker/dealers for funds borrowed to lend to margin account customers

90

describe interest rates on debt securities from lowest to highest

-federal fund rate
-discount rate
-broker call loan rate
-prime rate

91

the most marketable bonds have..

-short term maturities
-high credit ratings