Intro to Debt Securities Flashcards
Bearer Bonds
No known owner. Whoever possesses the certificate is the owner. They clip the coupons on it to receive the payments. They’re not typically issued these days.
Principal Only Bond
The name is recorded on the bond but the owner still has to clip the coupons to receive the payments.
Fully Registered
The name is recorded on the bond and no coupon clipping is necessary. Most bonds are issued this way in the USA.
Book/Journal Entry
No physical certificate. Only the brokerage statement is the proof of ownership. Fully registered bonds.
Par Value
Synonymous with principal amount, and face value. Always equal to $1,000 unless otherwise stated. This is the amount the investor will receive once the bond reaches maturity regardless of the price they paid for it. A person who pays $1,000 on the secondary market for a bond is said to have “paid par”.
Discount
Whenever an investor buys a bond at a rate lower than the face value it is said they are buying at a discount.
Premium
Whenever an investor buys a bond at a rate higher than the face value it is said they are buying at a premium.
Corporate Bond Pricing
All corporate bonds are priced as a percentage of par into fractions of a percent. For example, a quote for a corporate bond reading 95 actually translates into:
95% × $1,000 = $950
A quote for a corporate bond of 97¼ translates into:
97.25% × $1,000 = $972.50
Nominal Yield
Quoted as a % of par. This never changes. May also be called the “coupon rate”.
Current Yield
Calculated by: annual income/current market price.
Yield to Maturity
Investor’s total annualized return.
For bonds purchased at a premium this will be the lowest yield.
For bonds purchased at a discount this will be the highest yield.
Yield to Call
If the bond is callable the investor could calculate the approximate years left until maturity. This extends past the yield to maturity and is therefore either the highest or lowest yield the investor will receive.
Real Interest Rate
Real interest rate = nominal interest rate - inflation.
Term Maturity
The entire principal is due on the maturity date.
Serial Maturity
A serial bond issue is one that has a portion of the issue maturing over a series of years. Traditionally, serial bonds have larger portions of the principal maturing in later years. The portion of the bonds maturing in later years will carry a higher yield to maturity because investors who have their money at risk longer will demand a higher interest rate.
