Debt - Bonds

Front 1

What are the two components of a bond

Back 1

Stream of interest payments over the life of the bond

Final Principal Repayment.

Front 2

If interest rates move up, the percentage downward price movement of bonds, ranked from from greatest percentage to least.

Back 2

Large Discount Bond (lowest coupon)

Small Discount Bond

Par Bond

Small Premium Bond

Large Premium Bond (highest coupon)

Front 3

Bonds with low coupon rates tend to trade at a

Back 3

Discount

Front 4

What is the relationship between the length of maturity on a bond and its duration

Back 4

The longer the maturity, the greater the duration

Front 5

What is the relationship between the coupon rate of a bond and its duration?

Back 5

The lower the coupon rate, the higher the duration.

Front 6

Definition of Nominal Yield

Back 6

the stated rate of interest on a bond

Front 7

Definition of Current Yield

Back 7

A yield that takes into account the market price of the bond.

Front 8

What is the formula for Current Yield

Back 8

Annual Interest in Dollars / Bond's Market Price

Front 9

Yield to Maturity takes into account..

Back 9

market price of the bond as well as any capital gains or losses on the bond, if held to maturity.

Front 10

Will Yield to Maturity be greater than Current Yield for a discount bond or a premium bond? Why?

Back 10

Discount Bond

YTM is highest for a discount bond because it reflects that the bond is being purchased for less than par and it reflects the annual earnings of the bond discount as part of the investment return.

Front 11

What does it mean by Amortization of the Bond Preium

Back 11

when a bond is purchased at a premium over par, the premium is "lost" over the life of the bond

In other words, the capital loss is pro-rated over bonds life to include effect of annual capital loss on the bonds yield.

Front 12

Why is Yield to Maturity is lowest for a Premium Bond

Back 12

because it reflects the fact that the bond is being purchased for more than par and it also reflects the annual loss of the bond premium as a reduction of the investment return.

Front 13

When is a bond issuer likely to call in a callable bond? Why would the issuer want to call in these bonds at this time?

Back 13

Issuer would call in the bonds typically when interest rates fall.

This is because they can then issue new bonds at a lower interest rate.

Front 14

Why is it never welcomed, from an investor standpoint, when a investor calls in a bond.

Back 14

Because while the investor might get a premium, the issuer then has to reinvest his money at a lower interest rate.

Front 15

How many years of "Call Protection" does an investor have with a bond.

Back 15

10 years. Investors are reluctant to buy bonds with shorter lengths of call protection.

Front 16

In regards to Callable Bonds, what is the different between when a conventional bond is called and a Zero-Coupon Bond is called?

Back 16

Conventional Bonds are called at par + a call premium

Zero-Coupon Bonds are called at their accredited value (purchase price + compound growth-to-date) + a Call Premium

Front 17

What is a Put Provision

Back 17

A provision that allows the bondholder to resell a bond back to issuer at a price (usually at par) on certain stipulated dates prior to maturity

Front 18

Who is a Put Provision beneficial to and why?

Back 18

It's beneficial to the bondholder.

Protects against changes in interest rates or credit quality of the bond issuer. It also adds a floor price for the bond. Both of which mitigate risk.

Front 19

Why would an issuer place a put-provision on a bond.

Back 19

To make it more marketable and keep from having to increase the coupon-rate.

Front 20

When would a Put-Provision likely be called?

Back 20

in the event if interest-rates rise or a bond creditor rating decreases

Front 21

Relationship between an increase in Interest Rates in the market and the YTM of outstanding bonds.

What happens to YTC?

Back 21

If interest rates increase the YTM must increase to keep the bond competitive.

At the same time the YTC must also increase, due to drop in the bond's price.

Front 22

For a Discount Bond, the YTC is ________ than the YTM? Why is this?

Back 22

Greater

since discount is earned faster

Front 23

For a Premium Bond the YTC is ______ than the YTM

Why is this?

Back 23

Less

Since Premium is lost faster.

Front 24

According to Moody's and Fitch what is the credit rating of U.S Treasury Bonds??

Back 24

AAA

Front 25

According to Moody's short term ratings for commercial paper?

What do they stand for?

Back 25

P1, P2, P3, and NP

P = Prime Paper

NP = Not Prime

Front 26

What are Moody's short term ratings for Municipal Notes?

What do they stand for?

Back 26

MIG 1

MIG 2

MIG 3

SG

MIG = Moody's investment Grade

SG = Speculative Grade

Front 27

What are Standard and Poors short term ratings for Commercial Paper

Back 27

A Rated: A-1 A-2 A-3

B Rated: B

C Rated: c

Front 28

When it comes to short term securities such as commercial paper, institutional investors and mutual funds usually limit purchases too what grades? (Standard and Poors and Moody's)

Back 28

Moody's: P1 and P2

Standard and Poors: A1 and A2

Front 29

Another word for "Market Risk" is?

Back 29

Interest Rate Risk

Front 30

Interest Rate risk only applies to what type of securities?

Back 30

Fixed-Income Securities.

Front 31

Describe a variable-rate bond

Back 31

The interest-rate on the bond is periodically reset to the market. If the market rate goes up so will the bond rate.

Because interest rates move with market the price stays close to par

do not have interest rate risk

Front 32

Define Purchasing Power Risk

Back 32

Also called inflation risk.

The risk that inflation will lower the value of the bond with both interest payments and principal repayment.

Front 33

What happens when inflation rises quickly?

Back 33

Interest rates go up.

Front 34

What protects against Purchasing Power Risk?

Back 34

TIPS (Treasury Inflation Protection Securities)

Front 35

What is Marketability Risk?

Back 35

The risk that a security will be difficult to sell.

Front 36

Where is Marketability Risk basically non-existent?

Back 36

Treasury bond market, because of its size and liquidity.

Front 37

What is Liquidity Risk?

Back 37

risk that the security can only be sold by incurring large transaction costs.

Front 38

Which securities tend to be affected most by Liquidity Risk?

Back 38

Bonds with longer maturities and lower qualities.

Front 39

What is Legislative Risk?

Back 39

The risk that new laws will reduce the value of a security.

Front 40

What is Call Risk?

Back 40

the risk that a bond may be redeemed prior till maturity, forcing reinvestment of the proceeds at a lower interest rate.

Front 41

What happens to Call-Risk as interest rates go down?

Back 41

It increases as interest rates go down.

They can call in bonds at high rate and refund them back out at lower rate.

Front 42

Which types of bonds are the most susceptible to call-risk?

Back 42

bonds with high coupon rates and low call premiums.

(less likely to be called when the coupon rates are low and their are high call premiums.)