SIE Unit 3

Question 1

What are the basic characteristics of bonds?

Answer 1

par value, maturities, coupon rates, and accrued interest.

Question 2

What do you call an amount paid to the investor as principal at maturity?

Answer 2

Par Value

Question 3

This is when the investor receives the loan principal back.

Answer 3

Maturities

Question 4

________ are structured so that the principal of the whole issue matures at once.

Answer 4

Term bonds

Question 5

For term bonds, the entire principal is repaid at one time, issuers may establish a ________ to accumulate money to retire the bonds at maturity.

Answer 5

sinking fund (cash reserve)

Question 6

________ schedule for portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.

Answer 6

Serial bonds

Question 7

________ have a maturity schedule that is a hybrid of both serial and term maturities. The issuer repays part of the bond’s principal before the final maturity date but pays off the major portion of the bond at final maturity.

Answer 7

Balloon bonds

Question 8

It is an interest rate the bond issuer has agreed to pay the investor.

Answer 8

Coupon Rates

Question 9

What are the other terms of coupon rates?

Answer 9

stated yield or nominal yield

Question 9

What’s the most common value of a par value in debt securities?

Answer 9

$1000

Question 10

A _________ for a bond is the opposite of a call feature. Instead of the issuer calling in a bond before it matures, a put feature allows the investor to force the issuer to pay off the bond before it matures.

Answer 10

put feature

Question 11

What happens if the bond trades between coupon payments?

Answer 11

Accrued Interest

Question 12

Does the buyer of zero-coupon bonds pay accrued interest?

Answer 12

No, because these securities do not pay interest.

Question 13

How often is interest typically paid?

Answer 13

Semiannual basis

Question 14

It is a process of calculating a bond’s issue price based on the coupon, par value, yield, and term to maturity.

Answer 14

Bond pricing

Question 15

What is the cost of borrowing money (for the issuer) and the reward for lending money (for the investor)?

Answer 15

interest rate

Question 16

Bond prices have an ______ relationship to interest rates.

Answer 16

inverse

Question 17

What market forces impact bond prices?

Answer 17

interest rate sensitivity and
general supply and demand

Question 18

What is the reason why most investors purchase debt securities?

Answer 18

Interest payments

Question 19

______ is a measure of a bond’s interest payments in relation to the bond’s value.

Answer 19

Yield

Question 20

What are the several factors that are set for a yield?

Answer 20

• the bond’s rating (how safe they are to invest in),
  -general interest rates,
• time to maturity,
• and any other features the bond may have (like a call feature)

Question 21

What are the types of bond yields?

Answer 21

*nominal yield
*Current yield (CY)
*Yield to maturity (YTM)
*Yield to call (YTC).

Question 22

_______ measures a bond’s annual coupon payment (interest) relative to its market price.

Answer 22

Current yield

Question 23

What is the equation of current yield?

Answer 23

Current Yield = annual coupon payment / market price.

Question 24

A bond’s ________ reflects the annualized return of the bond if held to maturity.

Answer 24

Yield to maturity (YTM).

Question 25

YTM is sometimes called a bond’s ________.

Answer 25

basis

Question 26

It is when a bond is called in by the issuer, the investor receives the principal back sooner than anticipated (before maturity).

Answer 26

Yield to call (YTC).

Question 27

Yields are measured in ________.

Answer 27

basis points

Question 28

Bonds can be issued with different features attached. What are those?

Answer 28

call feature, the put feature, the convertible feature, and zero-coupon bonds.

Question 29

What do you call a feature that allows an issuer to redeem a bond before maturity?

Answer 29

call feature

Question 30

This feature allows the investor to convert the bond into shares of the issuer’s common stock.

Answer 30

Convertible Feature

Question 31

_________ are debt obligations that do not make regular interest payments.

Answer 31

Zero-coupon bonds (zeroes, sometimes abbreviated ZR)

Question 32

Though a zero’s interest payment is paid at maturity, owners of zeroes will pay taxes on the interest __________.

Answer 32

annually

Question 33

It is the difference between the discounted purchase price and the face value at maturity.

Answer 33

the interest the investor receives

Question 34

Why is zero-coupon bonds different from other bonds?

Answer 34

these bonds are more volatile

Question 35

The purchase of a debt security is only as safe as the strength of the borrower. That strength can be enhanced if the loan has _________.

Answer 35

collateral

Question 36

The 3 major rating organizations recognized by the Securities and Exchange Commission (SEC) are:

Answer 36

„ Fitch Ratings, Inc., „ Moody’s Investors Service, Inc., and „ Standard & Poor’s Rating Service (S&P).

Question 37

The most important rating organizations for the exam are:

Answer 37

Standard & Poor’s and Moody’

Question 39

According to Standard & Poor’s rating system, the four highest grades of bonds (from best to lowest grade) are:

Answer 39

AAA, AA, A, BBB

Question 40

Bonds rated in the top four categories (BBB or Baa and higher) are called ________.

Answer 40

investment grade

Question 41

It is generally the only quality eligible for purchase by institutions (e.g., banks or insurance companies) and by fiduciaries.

Answer 41

Investment-grade bonds

Question 42

High-yield bonds are lower-grade bonds, once known in the industry as ________.

Answer 42

junk bonds

Question 43

What do you call a bond’s sensitivity to changes in interest rates?

Answer 43

volatility

Question 44

Its a way of measuring a bond’s volatility that combines maturity and coupon rate.

Answer 44

duration

Question 45

Benefits of debt investments:

Answer 45

*Income *Safety

Question 46

Risk of debt investment:

Answer 46

*Default *Interest Rate Risk *Purchasing Power Risk

Question 47

The primary risk when owning any debt security is that the issuer will fail to pay interest or principal when due.

Answer 47

Default

Question 48

__________ are the safest investment for U.S. investors

Answer 48

Treasury-backed securities

Question 49

It is a debt that has collateral, meaning that an asset of the corporation is pledged to secure the loan

Answer 49

Secured debt

Question 50

Types of secured bonds:

Answer 50

*Mortgage Bonds *Equipment Trust Certificate *Collateral Trust Bonds

Question 51

A type of secured bonds that are backed by real estate that is owned by the corporation.

Answer 51

Mortgage bonds are backed by real estate that is owned by the corporation.

Question 52

These bonds are secured by equipment the corporation uses in its operations.

Answer 52

Equipment Trust Certificate

Question 53

These bonds are backed by a portfolio of securities held in trust to secure the loan.

Answer 53

Collateral Trust Bonds

Question 54

It is a term that means the asset, securities in this case, are held in a separate account and can’t be touched except for the purpose designated, like providing collateral for a loan.

Answer 54

Held in trust

Question 55

These are debt securities that are not backed by collateral. These debts are based on the financial strength of the issuer.

Answer 55

unsecured debt

Question 56

Types of Unsecured Debt:

Answer 56

*Debentures *Guaranteed Bonds *Income Bonds *Subordinate Debt

Question 57

These bonds are the most senior (highest priority) of the unsecured debt obligations, and you may see the term “senior debt” on the exam.

Answer 57

Debentures

Question 58

These are the responsibility of the issuer but are further backed by a third party should the issuer default

Answer 58

Guaranteed bonds

Question 59

Also called adjustment bonds, these bonds only make interest payments when the company has enough income and the board authorizes the payments.

Answer 59

Income Bonds

Question 60

These debt obligations are below debentures in order of seniority. They often carry a higher coupon rate because of the additional risk. You may also see the terms “subordinated debenture” or “junior debt” to describe these bonds.

Answer 60

Subordinated Debt

Question 61

order of liquidation in corporate dissolutions:

Answer 61

*Secured debtholders *Unsecured debt (debentures) and general creditor *Subordinated debtholders *Preferred stockholders *Common stockholders

Question 62

Are the only Treasury securities issued at a discount;

Answer 62

T-bills and STRIPS

Question 63

GOVERNMENT SECURITIES

Answer 63

*Treasury Bill *Treasury Notes