PP 4 - The Bond Market

Question 1

bond market securities are…

Answer 1

debt instruments with more than 1 year to maturity

Question 2

what are treasury bonds and notes?

Answer 2

debt obligations of the federal government with maturities of one year or more

Question 3

T-Bills maturity

Answer 3

1 to 10 years

Question 4

T-bonds maturity

Answer 4

10 to 30 years

Question 5

what is a municipal bond?

Answer 5

tax exempt bonds issued by state and local governments

Question 6

two types of municipal bonds

Answer 6

general obligation bonds, revenue bonds

Question 7

general obligation bonds are…

Answer 7

backed by the taxing power

Question 8

revenue bonds are…

Answer 8

issued to finance particular projects and are backed by revenue from that project

Question 9

revenue bonds are ____ and _____ then general obligation bonds

Answer 9

riskier, less popular

Question 10

do municipal bonds default?

Answer 10

yes, from time to time

Question 11

what are corporate bonds?

Answer 11

long-term debt to fund corporate projects

Question 12

what are mortgage and asset backed securities?

Answer 12

an ownership claim in a pool of mortgages or other loans (ex. car, student, credit card)

Question 13

what is federal agency debt?

Answer 13

issued by the government agencies to channel credit to a particular secure of the economy (eg Fannie Mae, Ginnie Mae, Freddie Mac)

Question 14

what is the biggest sector of the US bond market?

Answer 14

treasury debt

Question 15

bondholders receive…

Answer 15

fixed payments

Question 16

what is included in bondholders fixed payments?

Answer 16

principle + interest

Question 17

what do stockholder receive?

Answer 17

whatever is leftover after the bondholders have been paid

Question 18

stockholder receive more of the upside if…

Answer 18

project succeeds

Question 19

who is more likely to prefer riskier projects?

Answer 19

stockholders

Question 20

what are bondholder primarily concerned with?

Answer 20

limiting risk, and the use of additional debt

Question 21

bond covenants are for which instrument?

Answer 21

corporate bonds

Question 22

the more debt a firm uses to finance a project…

Answer 22

the riskier the firm become

Question 23

why is it riskier for a firm to use more debt?

Answer 23

may not be able to fully repay

Question 24

how do bondholders attempt to protect themselves?

Answer 24

by including covenants in bond agreements

Question 25

what do the covenants in bond agreements do?

Answer 25

limit the additional use of additional debt and contain managers actions

Question 26

common restricts of covenants

Answer 26

financial performance (limit levels of cash flow), maximum level of leverage

Question 27

what happens if covenants are violated?

Answer 27

bondholders have the right to increase the interest rate on the loan, accelerate the loan payments, reduce available funds, or directly intervene in restricting investments of the firm

Question 28

further consequences of a covenant violation?

Answer 28

reduced access to credit line from banks; bondholders may affect corporate government by working behind the scene to offer advice to management and the board, LOWER CREDIT LINE WHICH LOWERS A LOT

Question 29

bondholders are the...

Answer 29

lenders

Question 30

shareholders are the...

Answer 30

borrowers

Question 31

covenant-lite loans are...

Answer 31

recent phenomenon that are gaining popularity. do not include covenants which protects lenders

Question 32

pro of covenant-lite loans

Answer 32

may encourage more investment in the economy and boost encomia growth

Question 33

con of covenant-lite loans

Answer 33

represent riskier lending, may reduce financial stability

Question 34

what is the key feature of municipal bonds?

Answer 34

tax-exempt

Question 35

with a municiple bond, investors pay..

Answer 35

neither federal nor state taxes on interests

Question 36

for municipal bonds, investors would be willing to accept ____ yields

Answer 36

lower

Question 37

an investor choosing between taxable and tax-exempt bonds needs to...

Answer 37

compare after tax returns on each bond