Unit 2 Flashcards
(110 cards)
1
Q
What is PAR VALUE?
A
Most DEBT SECURITIES have a par value of $1,000. This is also called the PRINCIPAL or FACE VALUE.
2
Q
Name the different TYPES OF MATURITIES
1.
2.
3.
A
term,
serial, and
balloon.
3
Q
What is MATURITY DATE?
A
This is the DATE the investor receives the LOAN PRINCIPAL BACK.
4
Q
What is the COMMON MATURITY RANGE?
A
common maturities are in the range of
5-30 years
5
Q
What is TERM BOND?
A
A term bond is structured so that the PRINCIPAL of the whole issue MATURES AT ONCE. Because the entire principal is repaid at ONE TIME, issuers may establish a SINKING FUND ACCOUNT to ACCUMULATE MONEY
TO RETIRE THE BONDS AT MATURITY.
6
Q
The term “SERIES” normally refers to
A
types of SAVINGS BONDS
7
Q
What are SAVINGS BONDS?
A
Savings bonds are a type of DEBT ISSUED by the FEDERAL GOVERNMENT that may be purchased and REDEEMED AT BANKS or from the TREASURY DEPARTMENT.
Savings bonds DO NOT TRADE in the secondary market and, though they are a security, are EXEMPT from SEVERAL SECURITIES LAWS.
8
Q
What is a SERIAL BOND
A
a SERIAL BOND ISSUE schedules PORTIONS OF THE PRINCIPAL to MATURE AT INTERVALS OVER A PERIOD OF YEARS until the ENTIRE BALANCE has been REPAID.
9
Q
True or False
SERIES is a TYPE OF MATURITY used with DEBT SECURITIES.
A
False
Series is NOT a type of maturity used with debt securities.
The term SERIES normally refers to types of SAVINGS BONDS.
10
Q
How is INTEREST normally paid?
A
paid on a SEMIANNUAL basis
11
Q
What is a BALLOON BOND?
A
An issuer sometimes schedules its bond’s maturity using elements of both SERIAL AND TERM MATURITIES.
The issuer REPAYS PART OF THE BOND’S PRINCIPAL before the final maturity date, as with a serial maturity but pays off the major portion of the bond at maturity.
12
Q
What are COUPONS?
A
COUPONS represent the INTEREST RATE the ISSUER HAS AGREED TO PAY THE INVESTOR.
13
Q
Regarding ACCRUED INTEREST, what happens if the bond trades 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.
This means the NEW OWNER gets paid the FULL COUPON from the issuer in the NEXT PAYMENT CYCLE.
14
Q
What is ANOTHER NAME given to COUPONS
A
STATED YIELD
or
NOMINAL YIELD
15
Q
How do CORPORATE AND MUNICIPALS calculate their ACCRUED INTEREST?
A
use a 30-day-month/360-day-year calculation for accrued interest.
16
Q
How is STATED YIELD calculated?
A
It is calculated from the bond’s PAR VALUE, usually stated as a PERCENTAGE OF PAR
17
Q
a bond with a 6% coupon is paying $___ in interest per year
A
60
(6% x $1,000 par value = $60)
18
Q
TREASURY BONDS AND NOTES transactions employ the ___________ when calculating the amount of ACCRUED INTEREST DUE
A
actual number of days elapsed
19
Q
True or False
Buyers of ZERO-COUPON BONDS do not pay ACCRUED INTEREST because these securities are NOT INTEREST BEARING.
A
true
20
Q
How is bond pricing MEASURED?
A
Bond pricing is measured in POINTS, with EACH POINT equaling 1% OF FACE VALUE
21
Q
What impacts bond PRICING?
A
supply and demand
22
Q
What is the INTEREST RATE in relation to WHAT THE ISSUER PAYS?
A
the INTEREST RATE THE ISSUER PAYS is the COST OF BORROWING MONEY
23
Q
What RELATIONSHIP does INTEREST RATE and BOND PRICE have?
A
INVERSE
If INTEREST RATES go UP, BOND PRICES for those trading in the secondary markets will go DOWN.
24
Q
How does COUPON VALUE change in relation to a PRICE CHANGE IN BOND PRICES?
A
Though the PRICE OF A BOND will REACT TO MARKET FORCES (interest rate sensitivity and general supply and demand), the coupon is ALWAYS THE SAME.
The coupon is a FIXED PERCENTAGE OF PAR VALUE
25
What is a BOND'S YIELD?
A bond's yield expresses the CASH INTEREST PAYMENTS in relation to the BOND'S VALUE.
26
How is YIELD determined?
determined by the
- issuer's CREDIT QUALITY,
- prevailing INTEREST RATES,
- time to MATURITY,
- and any FEATURES the bond may have, such as a CALL FEATURE
27
What is NOMINAL YIELD?
Coupon, nominal, or stated yield is set at the TIME OF ISSUE.
Remember that the coupon is a FIXED PERCENTAGE of the bond's par value.
28
How is yield measured?
measured in basis points. A basis point is a measurement of yield equal to 1/100 of 1%.
29
What is the difference in measurement of yield and bond price?
a point is a measurement of the change in a bond's price, which equals 1% of face value while basis point is a measurement of yield equal to 1/100 of 1%.
30
What is current yield?
CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation:
annual coupon payment + market price = current yield
31
If you see a bond that is trading on a "basis of" and the question then provides you a yield, that yield is
the yield to maturity (YTM)
32
Describe a bond with a call feature
A bond with a call feature may be redeemed before maturity at the issuer's option. Essentially, when a callable bond is called in by the issuer, the investor receives the principal back sooner than anticipated (before maturity).
33
Describe yield to maturity?
A bond's YTM reflects the annualized return of the bond if held to maturity. In calculating yield to maturity, the bondholder takes into account the difference between the price that was paid for a bond and par value received when the bond matures.
34
How is yield to call calculated?
reflect the early redemption date and consequent acceleration of the discount gain if the bond was originally purchased at a discount, or the accelerated premium loss if the bond was originally purchased at a premium.
35
Your customer calls you with a question. The customer tells you that they received a phone call from the bond desk telling the customer that a trade to purchase 20 bonds at 100 has been executed for the customer's account. The customer would like to know how much they paid for the bonds before any commission or other charges. The answer to the customer's question is
A. $2,000.
B. $200,000.
C. $1,000.
D. $20,000.
D. $20,000.
Paying “100” means they paid 100% of par ($1,000) per bond. They purchased 20 bonds, so a total of $20,000. Not that the question concerned “how much they paid for the bonds,” not the price per bond.
36
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.
The term “a 7% basis” means that the YTM is 7%. YTM is higher than the COUPON RATE (6%), so the bond trades at a discount.
CURRENT YIELD must be BETWEEN THE COUPON RATE AND THE YTM.
37
A BB-rated 6% corporate callable bond that matures in 12 years that is trading at 100.25 is priced at
A. a discount.
B. a premium.
C. with a current yield above 7%.
D. with a coupon rate below 6%.
B. a premium.
There are a lot of words, but the only thing you need to understand in order to answer this question is that the bond is TRADING ABOVE PAR (100), so it’s at a PREMIUM.
38
What is BOND RATING?
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 COLLATERAL.
Because SAFETY OF THE BOND will frequently be a VERY IMPORTANT CONSIDERATION FOR CLIENTS, most investors consult the RATING SERVICES.
39
Based on STANDARD AND POORS RATING SERVICE, what does “BBB” mean?
Adequate capacity to repay principal and interest.
Slightly speculative
40
Based on STANDARD AND POORS RATING SERVICE, what does “C” mean?
NO INTERST is being paid on bond at this time.
41
What is the HIGHEST BOND RATING?
AAA or Aaa
42
Based on STANDARD AND POORS RATING SERVICE, what does “A” mean?
Judged to be SLIGHTLY MORE susceptible to adverse economic conditions.
43
What is INVESTMENT GRADE?
In the industry, BONDS RATED in the TOP FOUR CATEGORIES (BBB or Baa and higher) are called INVESTMENT GRADE.
44
What are the 3 major credit rating agencies?
■ Fitch Ratings, Inc.
■ Moody's Investors Service, Inc.
■ Standard and Poor's Rating Service (S&P)
45
POOR'S RATING SYSTEM, the FOUR HIGHEST GRADES OF BONDS (from best to lowest grade) are
A. Aaa; Aa; A; Baa.
B. A; Aa;Aaa; B.
C. B; A; AA; AAA.
D. AAA; AA; A; BBB.
D. AAA; AA; A; BBB.
Choice A would refer to Moody's
46
Why does investment grade bonds have greater liquidity?
Investment-grade bonds are generally the only quality eligible for purchase by the institutions (e.g., banks or insurance companies) and by fiduciaries
47
What is junk bond?
lower-grade bonds or high yield bonds
48
What is nonrated bonds?
not all bonds are rated. The rating organisations rate those issues that either pay to he rated or have enough bonds outstanding to generate constant investor interest. The fact that a bond is not rated does not indicate its quality.
49
Why does lower rated bonds carry high rates of return?
.lhe less creditworthy the borrower, the more risk to the lender. That requires a greater reward to the lender to compensate for that risk. That is why lower. rated bonds carry higher rates of return.
50
What is volatity?
A bond's sensitivity to these movements is called
51
Is volatility more or less with an decrease in the coupon value?
the lower a bond's coupon rate, the more volatile it is
52
What is the measurement of a bond's volatility ?
Duration
53
What is a put feature of bond?
A put feature for a bond is the opposite of a call feature. Instead of the issuer calling in a bond before it matures, with a put feature, the investor can put the bond hack to the issuer before it matures.
54
When is a bond considered more volatile?
The more a bond moves in response to a change in interest rates, it is said to be more volatile; the less it moves, the less volatility it has
55
What is a call feature of a bond?
allows an issuer to call in a bond before maturity. Issuers will generally do this when interest rates are falling.
56
Duration may also be used to measure
the overall volatility of a portfolio of bonds
57
Describe the convertible feature of a bond
convertible bonds are issued by corporate issuers, allowing the investor to convert the bond into shares of common stock. Giving the investor the opportunity to exchange a debt instrument for one that gives the investor ownership rights (shares of common stock) is generally considered a benefit for the investor
58
Below which of the following S&P ratings would a bond be considered speculative?
A. A
B. B
C. BB
D. BBB
D
59
Which of the following bonds would have the most price volatility? A. 3%10-year T-note
B. 2%5-year T-note
C. 5%20-year T-bond
D. 5% 15-year corporate bond
C
60
If a bond has a feature that allows the issuer to pay off bondholders prior to maturity, the bond has A. a put feature. B. a call feature. C. a conversion feature. D. a presale feature.
B
61
What are zero coupon bonds?
are an issuers debt obligations that do not make regular interest payments. Instead, 0s are issued. or sold, at a deep discount to their face value and mature at par.
62
The difference between the discounted purchase price and the full face value at maturity is the
return or accreted interest, the investor receives.
63
when bonds are issued with features that benefit the issuer, such as a call feature, the issuer generally will need to pay a slightly higher
coupon rate of interest to make the bond attractive to new investors.
64
E Lonsdale Corporation issue a zero-coupon bond at a price of 50 ($500 a bond) maturing in 20 years. The bond makes no interest payments. At maturity, it pays face value (par $1,000) to investors; $500 principal and $500 interest. This would calculate to an interest rate of
3.6%
65
Who issues zero coupon bonds?
corporations, municipalities, and the U.S. Treasury (Treasury-issued zeroes are called STRIPS) and may be created by broker-dealers from other types of securities.
66
when bonds are issued with features that benefit the bondholder. such as put or conversion features. the issuer will usually pay a slightly lower
coupon rate of interest because the feature will compensate for the lower return.
67
What is a more common form of broker-dealer-created zeroes is built from ?
a basket of T-bonds.
68
True or False
Though the interest payment is paid at maturity, owners of zeroes will pay taxes on the interest annually
True
69
What is considered phantom income or annual accretion of the discount?
The total interest payment is divided by the years remaining to maturity and a 1099 Interest form will be sent to the owners. If the interest payment is $500 and 10 years remain to maturity, then the 1099 will reflect $50 every year.
70
What is secured debt securities and unsecured debt securities?
Secured debt securities are backed by various kinds of assets owned by the issuer, whereas unsecured debt securities are backed only by the reputation, credit record, and financial stability of the issuer
71
What are some secured debt?
Mortgage bonds
Equipment trust certificates
Collateral trust bonds
72
What is mortgage bonds?
a corporation will borrow money backed by real estate and physical assets of the corporation. Just as a home ordinarily would have a market value greater than the principal amount of its mortgage. If the corporation develops financial problems and is unable to pay the interest on the bonds, those real assets pledged as collateral are generally sold to pay off the mortgage bondholders.
73
What is equipment trust certificates?
Title to the newly acquired equipment is held in trust, usually by a bank acting as a trustee, until the certificates have been paid in full. When the railroad has finished paying off the loan, it receives clear title to its equipment from the trustee
74
What will occur if the railroad does not make payments in equipment trust certificates?
If the railroad does not make the payments, the lender repossesses the collateral and sells it for his benefit.
75
What is collateral trust bonds?
a corporation wants to borrow money and has neither real estate (to back a mortgage bond) nor equipment (to back an equipment trust) to use as collateral. Instead, it deposits securities it owns into a trust to serve as collateral for the lenders. The securities the corporation deposits as collateral for a trust bond can be securities issued by the corporation itself or by stocks and/or bonds of other issuers.
76
What are some unsecured debts?
Debentures
Guaranteed bonds
Income bonds
Subordinated Debt
77
What is debentures?
a debt obligation of the corporation backed only by its word and general creditworthiness. Debentures are written promises of the corporation to pay the principal at its due date and interest on a regular basis.
78
Describe debentures in relation to issuers with good credit standing
Although debentures are unsecured, there are issuers whose credit standing is so good that their debentures might be considered safer than secured bonds of less creditworthy companies
79
What is guaranteed bonds?
backed by a company other than the issuing corporation, such as a parent company.
80
Describe how guaranteed bonds work
The primary responsibility for the debt belongs to the issuer, but if the issuer defaults, the guaranty kicks in and the guarantying company must make the interest or principal payments. Because there is no asset held as security, these are unsecured debt.
81
Describe income bonds
are used when a company is reorganizing and coming out of bankruptcy.
82
What is another name for income bond?
also known as adjustment bonds
83
What is the order of liquidation?
■ Secured debt holders are first
■ Unsecured debt (debentures) and general creditors are second
■ Subordinated debt (debentures) are third in line.
■ Preferred stockholders come in next.
■ Common stockholders an last.
84
What is a subordinate debenture?
This means "belonging to a lower or inferior class or rank; secondary." It is usually used in describing a type of debenture. A subordinated debenture has a claim that is behind (junior to) that of any other creditor.
85
Why is Common stockholders an last in the liquidation process?
The actual owners of the company arc the last in line. This is the downside of being the investors that make the most when the company is successful. In a bankruptcy, it is extremely rare for the common stockholders to get anything at liquidation.
86
Note
All debentures (including income and guaranteed bonds) are senior to subordinated debt in order of priority.
87
Sometimes the term \_\_\_1\_\_\_ is used for debentures and \_\_2\_\_\_\_ for subordinated debentures.
1 senior debt
2 junior debt
88
True or False
Preferred stock, though not a debt, does produce a fixed payment and is subject to purchasing power risk
True
89
interest from a zero-coupon bond
A. pays monthly and is taxed annually.
B. pays annually and is taxed at maturity.
C. pays at maturity and is taxed annually.
D. pays and is taxed at maturity
C
90
Lando Entertainment, Inc., issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called
A. a collateral trust bond.
B. a guaranteed bond.
C. a headquarters debenture.
D. a mortgage bond.
D
91
An investor who is seeking income might choose a corporate bond because
A. a corporate bond pays a steady income and are generally reliable.
B. bonds pay a higher dividend than stocks.
C. bonds can grow faster than the rate of inflation.
D. corporate bond interest is tax free.
A
92
An investor is in the 30% tax bracket. A municipal bond currently yields 7%. To offer an equivalent yield, what must a corporate bond yield?
Divide the municipal yield by 100% minus the investor's tax bracket. This is known as the tax-equivalent yield formula. 7% ÷ (100% - 30%) = 10%
93
Which of the following are considered sources of debt service for GO bonds? I. Personal property taxes II. Real estate taxes III. Fees from delinquent property taxes IV. Liquor license fees
A. I and IV
B. II and III
C. II, III, and IV
D. I, II, III, and IV
D
94
The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years, and the interest and principal payments will be funded from real estate taxes. This is an example of
A. a GO bond.
B. a revenue bond.
C. a debenture.
D. an equipment trust bond.
A
95
Your customer is in the 30% federal tax bracket. He is considering purchasing a 7% corporate bond. The after-tax yield would be
A. 4.9%. B. 2.1%. C. 10%. 0. 7%.
A
7% (corporate rate) x (100%- 30% (tax bracket)). 7 x (1 -0.3) = 7 x 0.7 = 4.9%
96
\_\_\_\_\_\_\_\_\_\_\_\_ are the only Treasury security issued at a discount;
T-bills and STRIPS
97
T-bills are \_\_\_\_\_\_
highly liquid
98
What are t-bills?
T-bills are direct short-term debt obligations of the U.S. government. They arc issued weekly with maturities of 4 weeks, 13 weeks, 26 weeks, and at times, 52 weeks.
99
Who determines determines the quantity and types of government securities it must issue to meet federal budget needs.
U.S. Treasury Department
100
The _____________ is the nation's largest borrower, as well as its best credit risk.
federal government
101
The\_\_\_\_\_\_\_\_ is the nation's largest borrower, as well as its best credit risk.
federal government
102
T-bills are the only Treasury security issued without a \_\_\_\_\_\_\_\_\_\_\_-
stated interest rate
103
Do t-bills pay interest?
pay no interest in the way other bonds do; rather, they are issued at a discount from par value and redeemed at par.
104
an investor might purchase a $10,000, 26-week T-bill at a price of $9,800. She would receive no regular interest check, but at maturity, the Treasury would send her a check for $10,000. What is her interest income
The difference between the $9,800 she paid and the $10,000 she received
105
What are treasury notes?
T-notes are direct debt obligations of the U.S. government. They pay semiannual interest as a percentage of the stated par value, and they mature at par value.
106
Describe t-notes maturities
T-notes have intermediate maturities (2-10 years).
107
What are t-bonds?
T-bonds are direct debt obligations of the U.S. government. They pay semiannual interest as a percentage of the stated par value and mature at par value.
108
Describe t-bonds maturity
These government obligations have long-term maturities, greater than 10 years and up to 30 years.
109
What are treasury receipts?
Brokerage firms can create a type of bond known as a treasury receipt from U.S. Treasury notes and bonds. BDs buy Treasury securities. place them in trust at a bank, and sell separate receipts against the principal and coupon payments.
110
What is Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities)?
The Treasury Department has its own version of receipts known as Treasury STRIPS. The Treasury Department designates certain issues as suitable for stripping into interest and principal components.
