Unit 3 Debt Securities (Bonds)

Question 1

what is a bond?

Answer 1

a loan / debt security

Question 2

who are issuers of bonds?

Answer 2

corporations, municipalities, U.S. government

Question 3

who are the participants of a bond?

Answer 3

issuers and investors

Question 4

what does a bond pay?

Answer 4

fixed interest semiannually

Question 5

how long does a bond pay for?

Answer 5

a stated period until it matures

Question 6

what happens at bond maturity?

Answer 6

balance of the loan is repaid in a lump sum

Question 7

what value are bonds issued at?

Answer 7

par value with fixed interest rate

Question 8

which market do bonds trade in?

Answer 8

secondary market

Question 9

how do bonds trade in secondary market?

Answer 9

at premium or discount

Question 10

what are the types of corporate bonds?

Answer 10

secured and unsecured

Question 11

what are secured bonds backed by?

Answer 11

specific asset such as mortgages, equipment, or other collateral owner by issuer

Question 12

what are unsecured bonds backed by?

Answer 12

issuer’s credit and promise to pay

Question 13

what are u.s. gov. bonds charactarized by?

Answer 13

high liquidity and safety of principal since they are backed by full faith and credit of the federal gov.

Question 14

who issues municipal bonds?

Answer 14

states, counties, cities, or other political subdivisions

Question 15

what backs municipal bonds?

Answer 15

either the taxing power of the municipality or the revenue generated from fees by users of municipal bonds

Question 16

what are money market securities?

Answer 16

short- term debt instruments

Question 17

when do money market securities mature?

Answer 17

1 year or less

Question 18

what are characteristics of money market securities?

Answer 18

highly liquid and offer safety of principal

Question 19

where are issuer’s bonds sold?

Answer 19

primary offering

Question 20

what is a typical time frame for bond maturity?

Answer 20

10-30 years from the date of issue

Question 21

what is principal?

Answer 21

amount of money borrowed by the issuer

Question 22

what is par value? how much?

Answer 22

face value, $1000

Question 23

when is interest paid?

Answer 23

semiannually

Question 24

when is principal paid?

Answer 24

at maturity

Question 25

what are bond issue structures?

Answer 25

term, serial, or series bonds

Question 26

what is the structure of a term bond?

Answer 26

every bond having the same interest rate and maturity date

Question 27

what is the structure of a serial bond?

Answer 27

varying maturities and interest rates

Question 28

how are corporate and US gov bonds structured?

Answer 28

term bond

Question 29

how are municipal bonds structured?

Answer 29

serial bond

Question 30

what is the structure of a balloon maturity?

Answer 30

a larger amount of bonds maturing on a specific date

Question 31

what is the structure of a series bond?

Answer 31

varying dates of issuance all maturing at the same time

Question 32

what is a coupon rate?

Answer 32

bond's annual rate

Question 33

what is coupon rate expressed as?

Answer 33

par value or $1000

Question 34

when is interest paid on coupon rate?

Answer 34

semiannually

Question 35

how is coupon paid?

Answer 35

on the original $1000 principal balance

Question 36

what is another name for coupon rate?

Answer 36

nominal yield (NY)

Question 37

what is nominal yield/ coupon rate based on

Answer 37

$1000 par value

Question 38

how much of annual interest are bond holders paid?

Answer 38

half of the annual interest per payment

Question 39

what is a zero-coupon bond?

Answer 39

bonds that have no coupon at all but are issued at a discount from par

Question 40

what is the interest on a zero- coupon bond?

Answer 40

the difference between the discounted purchase price and par

Question 41

when is interest paid on zero-coupon bonds?

Answer 41

at maturity when the principal is repaid

Question 42

what is the accreted value?

Answer 42

value at any given time of a debt instrument that accrues(grows) interest over multiple years

Question 43

what is accretion?

Answer 43

method of taxing imputed interest

Question 44

what is imputed intetrest?

Answer 44

interest you are paying taxes on but have not yet received

Question 45

what is a maturity date?

Answer 45

time at which the borrower will repay the face value (principal balance) to the bondholder

Question 46

what is redemption?

Answer 46

repayment of principal on the maturity date

Question 47

what does the lenders' final payment include?

Answer 47

par value and the last semiannual coupon payment

Question 48

when is the lender's final payment due

Answer 48

at maturity from the issuer

Question 49

what is a short term debt instrument(bond)?

Answer 49

maturity date 2 years or less

Question 50

what is a intermediate term debt instrument (bond)?

Answer 50

maturity date 2-10 years

Question 51

what is a long term debt instrument (bond) ?

Answer 51

maturity of 10 or more years

Question 52

what type of underwriting is generally used for general obligation issues?

Answer 52

competitive bid

Question 53

what is current yield? (current market price for the bond)

Answer 53

bond's coupon and the price paid for the bond

Question 54

Municipal bonds with interest rates that are reset at specific intervals or after a specific event has occurred are called

Answer 54

Variable rate bonds

Question 55

negotiable certificates of deposit characteristics

Answer 55

have a maturity of 1 year or less

Question 56

characteristic of zero-coupon bonds (3)

Answer 56

1. purchased at a discount from par 2. pay no current income 3. more volatile than coupon bonds pay par at maturity, no semiannual interest, but their 'phantom income' is taxed each year

Question 57

A bond paying a 10% coupon rate is trading at a discount. The current yield will be

Answer 57

Higher than the coupon rate (When bond prices decline (discount bonds), yields rise)

Question 58

what is a treasure receipt? T-Receipt

Answer 58

A treasury receipt is a zero-coupon security

Question 59

who creates treasure receipts? T-Receipt

Answer 59

broker - dealers

Question 60

what type of Treasury securities are Treasury Receipts backed by?

Answer 60

T-notes or T-bonds

Question 61

what are the two Treasury Securities?

Answer 61

T- notes and T-bonds

Question 62

what is Commercial paper and what is it used for?

Answer 62

unsecured, short-term debt up to 9 months in maturity. It is used by corp. to fill short-term cash flow needs

Question 63

what is A bankers' acceptance?

Answer 63

debt securities used to finance foreign trade

Question 64

what are Mortgage bonds?

Question 65

what are Debentures?

Answer 65

bond issuers that are not secured by collateral A debenture is an unsecured debt instrument. It is backed solely by the issuer’s full faith, credit, and promise to pay

Question 66

what is Collateral trust certificate?

Answer 66

backed by underlying assets or collateral (securities of another company.)

Question 67

what is Subordinated debenture?

Answer 67

have a secondary claim to assets in the event of bankruptcy (behind straight debentures)

Question 68

What is an Income bond?

Answer 68

no legal obligation to make interest payments and will only pay interest when the corporation earns enough income to do so

Question 69

how often do GNMA pass-through certificates pay out interest and principal

Answer 69

Monthly

Question 70

An investor that owns an 8% bond would receive how much on each interest payment date?

Answer 70

The investor will receive $80 per year ($1,000 x .08), but only $40 per payment since the bond pays interest semiannually.

Question 71

When interest rates increase, bond prices in the secondary market decrease

Answer 71

because new bonds will be issued at a higher interest rate, so the existing bonds (with the lower interest rates) are less attractive and drop in price The net asset value of a bond fund will rise and fall based on interest rates.

Question 72

comparing Treasury bills and Treasury receipts

Answer 72

Both securities are sold at a discount and pay interest at maturity

Question 73

unqualified opinion, this means:

Answer 73

everything is legally in order and there are no problems with the issue

Question 74

The maximum maturity for tax-exempt commercial paper is:

Answer 74

he maximum maturity is 270 days (9 months), and they are issued at a discount to par

Question 75

U.S. government bonds are taxable at the federal level, but they are state tax exempt. Municipal bonds are exempt from federal tax, but subject to state tax, unless it is your state of residence, in which case, they will be tax exempt at the state level as well.

Question 76

The relationship between prices and yields for outstanding corporate bonds when interest rates are changing is

Answer 76

A Inverse As yields rise, the prices of outstanding debt instruments will fall. As yields fall, the prices of outstanding debt instruments will rise. Therefore, the relationship is an inverse one

Question 77

Who issues negotiable CDs?

Answer 77

Negotiable CDs are issued by banks.

Question 78

If interest rates increase, the price of a bond will go down, making its current yield higher than the nominal yield.

Answer 78

Current yield will increase If interest rates increase, the price of a bond will go down, making its current yield higher than the nominal yield.

Question 79

Which T-bill is not auctioned weekly?

Answer 79

52 week

Question 80

Which of the following statements regarding Eurodollars in not true

Answer 80

Eurodollars are registered with the SEC