Unit 2: Debt

Question 1

Par value

Answer 1

principal or face value (assumed to be $1,000)

Question 2

Term bond

Answer 2

entire principal is paid at maturity

Question 3

Serial bond

Answer 3

principal is paid back in portions before maturity

Question 4

Balloon bond

Answer 4

part of principal is paid before maturity, remainder of principal is paid at maturity

Question 5

Bond yield

Answer 5

> a bond’s earnings generated over a particular period of time
annual interest relative to bond’s overall value

Question 6

Nominal/coupon yield

Answer 6

= annual interest / face value of bond (stated coupon rate)

Question 7

Current yield (CY)

Answer 7

= annual coupon payment / market price of bond

Question 8

Yield to maturity (YTM, “basis of”)

Answer 8

> annualized return of bond if held to maturity
lower if bond was purchased at premium
higher if bond was purchased at discount

Question 9

Yield to call (YTC)

Answer 9

> annualized return of bond if redeemed before maturity
lower if bond was purchased at premium
higher if bond was purchased at discount

Question 10

Call feature

Answer 10

> issuer is able to call in a bond before maturity

>exercised when interest rates are falling, issuer will want to issue new bond with lower interest

Question 11

Put feature

Answer 11

> investor is able to put bond back to issuer before maturity

>exercised when interest rates are rising, investor will want to purchase a new bond with higher interest

Question 12

Convertible feature

Answer 12

investor is able to convert bond into shares of common stock

Question 13

Zero-coupon bonds

Answer 13

> debt instrument that does not pay interest
sold at discount, investor will profit when bond matures and they collect par value
investor charged phantom income tax for theoretical interest earned at maturity

Question 14

Mortgage bond

Answer 14

> bond backed by real estate owned by corp.

>secured debt

Question 15

Equipment trust certificate

Answer 15

> bond backed by capital equipment owned by corp.

>secured debt

Question 16

Collateral trust bond

Answer 16

> bond backed by other securities owned by corp.

>secured debt

Question 17

Debenture

Answer 17

> bond backed by a corp.’s word

>unsecured debt

Question 18

Guaranteed bond

Answer 18

> bond backed by a third party corp.’s word

>unsecured debt

Question 19

Income bond

Answer 19

> bond backed by potential future income of corp.

>unsecured debt

Question 20

General obligation municipal bonds (GO)

Answer 20

> municipal bond for capital improvements that do not produce own revenue
backed by gov.’s ability to tax
taxed at state level unless buyer lives in issue state

Question 21

Revenue bond

Answer 21

> municipal bond for capital facility that will produce own revenue
backed by future revenue of facility
taxed at state level unless buyer lives in issue state

Question 22

Short-term municipal obligations

Answer 22

> municipal bond that generates funds when gov. expects other revenue soon
backed by expected future revenue
less than 12 month maturity
taxed at state level unless buyer lives in issue state

Question 23

Tax-free equivalent yield

Answer 23

> compares municipal and corporate bond yields

= municipal yield / (100% - investor tax rate)

Question 24

Treasury bills (T-bills)

Answer 24

>short term Federal bonds
>mature in 4, 26 or 52 weeks
>pay no interest
>issued at discount
>taxed at federal, not at state

Question 25

Treasury notes (T-notes)

Answer 25

>Federal bonds w/ 2-10 year maturity >semiannual interest >taxed at federal, not at state

Question 26

Treasury bonds (T-bonds)

Answer 26

>Federal bonds w/ 10-30 year maturity >semiannual interest >taxed at federal, not at state

Question 27

Treasury receipt

Answer 27

>bond made up of Treasury securities sold by private brokerage firms >sells bonds against principal and coupon of original security

Question 28

TIPS

Answer 28

>bond made up of Treasury securities sold by Treasury >sells bonds against principal and coupon of original security >taxed at federal, not at state

Question 29

Farm Credit System (FCS)

Answer 29

>sells bonds to raise loanable funds for agricultural financing >not backed by Federal gov. >taxed at federal, not at state

Question 30

Government National Mortgage Association (GNMA)

Answer 30

>sells bonds to raise money for Department of Housing and Urban Development >backed by mortgages & Federal gov. >taxed at all levels

Question 31

Federal Home Loan Mortgage Corporation (FHLMC)

Answer 31

>buys mortgages from banks and repackages them into mortgage-backed securities for investors >>not backed by Federal gov. >taxed at all levels

Question 32

Federal National Mortgage Association (FNMA)

Answer 32

>buys mortgages from Federal gov. and repackages them into mortgage-backed securities for investors >backed by themselves >taxed at all levels

Question 33

Money market security

Answer 33

source of short-term funds

Question 34

Certificate of deposit (CD)

Answer 34

>issued by banks to provide short term funds >can be traded on secondary market >jumbo CD has face value of $100K+

Question 35

Banker's acceptance (BA)

Answer 35

>postdated check or line of credit to be exercised within 1-270 days

Question 36

Commercial paper

Answer 36

>raises cash for smaller business purposes (A/R or inventory needs)

Question 37

Federal funds

Answer 37

>excess deposit in a Federal Reserve bank over required amount >can be loaned to other Feds to help them meet holdings requirement

Question 38

Collateralized mortgage obligations (CMO)

Answer 38

>security backed by pool of mortgages >spreads risk across all underlying mortgages >divided into tranches based on mortgages' maturity date

Question 39

Collateralized debt obligations (CDO)

Answer 39

>security backed by pool of non-mortgage loans | >spreads risk across all underlying loans