Unit 3 Flashcards
term bond
the loan principle is paid back in full at once at maturity.
serial bond
portions of principle are paid back in scheduled intervals.
balloon bond
combines term and serial repayment styles. scheduled principle payments are made with the majority being paid at maturity.
series bond
issued by federal gov. and are exempt from certain securities laws
coupon rate (nominal yield)
the interest rate of the bond. payment calculated from the bonds par value and coupon rate. if traded between payments, calculation are determined to date. (30day month / 360day year calander)
Trading bonds at par, at premium, or at discount.
par = at 1,000
premium = above 1,000
discount = below 1,000
Bond Yields
expresses cash interest payments in relation to bonds value. these are measured in basis points.
Nominal yield (coupon/stated yield)
set at time of issue.
Current yield
measures bonds annual coupon payment relative to its market price.
CY = annual coupon payment / market price
yield to maturity
the annualized return of the bond if held to maturity.
yield to maturity
the annualized return of the bond if held to maturity.
yield to call (call feature)
a bond issued with a call feature can be redeemed before maturity at issuers option. why would issuer pay 6% interest rate when they have dropped to 4%
put feature
the investor can put the bond back to the issuer before it matures. (why would investor accept 6% when interest rates have risen to 8%.
convertible feature
allow investor to convert the bond to common stock.
zero-coupon bond
no debt obligation. issued or sold at deep discount and mature at par. reflects interest rate climate. interest is still taxed on these.
Bond rating
a rating system which rates the strengths of borrowers. helps display safety and risk of bond. Rated with letter system.
3 major rating agencies
Fitch Ratings Inc.
Moody’s Investors Service Inc.
Standard and Poor’s Rating Service
Investment grade debt
bonds rated in top 4 categories. great liquidity. higher score means less risk but less reward bc of lower interest rates and vice versa. bonds with collateral are usually safer.
High-Yield Bonds
lower grade bonds with additional risk but higher returns due to higher interest rate.
Nonrated bonds
not an indication of quality or risk. many issues are too small to justify paying for a rating.
Volatility
a bonds sensitivity to a change in interest. remember bond prices move inversely to interest rates. typically the more time left on bond equals more volatility. The lower the bonds coupon rate the more volatile it is.
secured debt securities
Are backed by various kinds of assets owned by the issuer.
unsecured debt securities
backed only by the reputation, credit record, and financial stability of the issuer.
mortgage bonds
a corporation will borrow money back by real estate and physical assets of the corporation.
