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80 Cards in this Set
- Front
- Back
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debt securities
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-bonds
-money loaned to a corporation loaned by investors -corporation must pay interest and repay principal -speculative capitalization conservative investment |
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funded debt
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long-term debt, money borrowed, minimum of 5 yrs, investor=lender
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What is the par value of a bond?
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-$1000
-interest paid is always fixed as a percentage of it |
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Who is the largest issuer of debt securities?
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US Government
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municipal bonds
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money borrowed by state, city, county, town
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Describe par value
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-it is what the interest payment based upon
-amount of principal repaid at maturity |
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mortgage bonds
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real estate & physical assets pledged as collateral
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equipment trust certificate
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secured by the equipment purchased
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collateral trust bonds
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secured by stocks and bonds
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debentures
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-debt obligation backed by word and general credit worthiness
-depends on assets & earnings of the corporation |
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senior
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-priority of a claim of a security
-secured bonds senior to unsecured -bonds & preferred stock senior to common stock |
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subordinated debenture
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-has claim behind any other creditor
-still senior to any stockholder |
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types of municipal bonds
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-general obligation (GOs) bonds
-revenue bond -industrial revenue bonds |
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general obligation (GOs) bonds
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-type of municipal bond
-backed by pledge of full faith & credit -plege of ad valorem (property) taxes -bondholder supreior claim above mortgages & mechanic's liens -very safe |
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revenue bond
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-payable from earnings of revenue producing enterprise
-water, sewer, toll bridge, airport -historic or potential -high yield |
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industrial revenue bond
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-finance contruction of manufacturing or commercial facility
-benefit of a private user safety based on credit standing of corporation facility built for |
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Series EE Bonds
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-not negotiable
-purchased at a discount -mature at face value -must hold until maturity to receive interest at full rate -registered form |
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Series HH Bonds
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-not negotiable
-issued at par value -pay semi-annual interest |
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Treasury Bills
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-direct short term obligations of the government
-pay no interest -issued at discount from par value -maturity of 4 wks, 13 wks, 26 wks -book entry form |
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Treasury Notes
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-direct debt obligation of the Treasury
-pay sem-annual interest -interest % of stated par value -maturity of 1 to 10 years -mature at par value -book entry format |
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Treasury Bonds
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-direct debt obligation of the Treasury
-pay semi-annual interest -interest % of stated par value -maturity of 10 to 30 years -mature at par value -book entry format |
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US Federal Agency Securities
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-issued by US Govt agencies
-authorized by Congress to issue debt securities -moral obligation -interest rec'd exempt of state & local income taxes |
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What 2 principal US Federal Agencies issue debt securities?
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-Federal Farm Credit Bank
-Federal Home Loan Bank (FHLB) |
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2 mortgage backed securities
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-Federal National Mortgage Association (FNMA)
-Government National Mortgage Association (GNMA) |
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Federal National Mortgage Association (FNMA - Fannie Mae)
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-privately owned corporation
-purcahses & sells real estate mortgages insured by FHA or VA |
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Government National Mortgage Association (GNMA - Ginnie Mae)
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-federally owned corporation
-known as modified pass through certificate -backed by full faith & credit of the US Govt |
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modified pass through
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principal & interest from a GNMA "pass through" to the investor monthly as homeowne makes mortgage payment
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supply and demand
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-a lot of people want to borrow mooney & not a lot to go around, interest rates go up
-determines current market price ofa bond |
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prime rate
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-measurement of supply & demand
-rate charged by banks to most credit-worthy customers |
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risk-reward relationship
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-more risk investor takes, the more uncertainty
-greater must be the reward -lower-rated bonds carry higher rates of return |
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taxable equivalent yield
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-municiapl bonds tax free for state & local taxes
-tax-free yield divided by (100% minus the tax bracket) -7.5% divided by (100% - 28%) = 10.42% |
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What does it mean when a bond is selling at a premium?
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-bond is selling at a price above par
-buy bond at premium, receive a rate of return less than the coupon or nominal yield stated on the face of the bond |
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What does it mean when a bond is selling at a discount?
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-bond is selling at a price below par
-purchase bond at a discount, get more than the rate stated on the face of the bond (12.5% is greater than 10%) |
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What happens when you pay more?
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you get less
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What happens when you pay less?
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you get more
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yield-to-maturity (true yield
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takes into consideration the gain or loss the investor will have when the bonds are redeemed at maturity
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What interaction to interest rates and bonds prices have?
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-interest rates go up, outstanding bond prices fall
-interest rates fall, bond prices rise |
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current market price
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-may fluctuage
-may be at par, above par, or below par |
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What value does a bond mature at?
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par value
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What is the result of purchasing a bond at a premium?
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will get back par, which means less than your original investment (a loss)
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What is the result of purchasing a a bond at a discount?
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will get back par, which means more than your original investment (a profit
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How are corporates and municipals and governemnts and agency bonds quoted?
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as a percentage of par
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bond point
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$10 or 1% of $1,000 par value
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What is the fraction for corporates and municipals?
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1/8th (each 1/8th + $1.25)
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corporate or municipal quoted at 90 1/4 equals
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$902.50
( $900 + 1/2 of $10.00) |
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corporate or municipal quoted at 101 3/4
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$1017.50 ($1010 + 3/4 of $10.00)
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corporate or municipal quoted at 108 5/8
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$1086.25 ($1080 + 5/8 of $10.00 or 5 x $1.25)
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What does :1 mean when quoting government and agency bonds?
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1/32nd ($.31 1/4)
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government bond quoted at 90:8
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$902.50 ($900 + 8/32 or 1/4 of $10)
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government bond quoted at 101.24
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$1017.50 ($1010 + 24/32 or 3/4 or $10)
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government bond quoted at 87:16
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$875 ($870 + 16/32 or 1/2 of $10)
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term bond
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-simplest form of principal repayment
-one maturity date |
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serial maturities
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-common form of principal pay back
-mutilple maturity dates - ex. Equipemnt Trust Certificates -each year a portion of principal is repaid so that at no time is the outstnading debt greater than the value of the asset securing the loan |
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callable bonds
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-method by which debt securities ar epaid off prior to their maturity date
-permits the issuer to redeem its bond (pay off principal) before maturity |
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sinking fund
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-cash reserve systematically being established to cover the company's fnancial obligations
-portion of earnings deposited to special escrow account to retire a portion of its debt on a regular basis |
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How is the sinking fund used if interest rates go up (bond prices go down)?
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company will buy the bonds in the open market
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How is the sinking fund used if interest rates go down (bond prices go up)?
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company will call in a portion of the bonds in an amount equal to the size of the sinking fund
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convertible bonds
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-can be converted or exchanged for the company's common stock
-exact number of shares that bond will be converted into at any point in time (or method of computing) is printed in the bond indenture at the time of issue |
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What are 2 advantages to investors of convertible bonds?
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-opportunity for capital gains if the common stock of the issuer should rise in price
-even if the stock doesn't go up, you still own a debt security paying a fixed interest rate & maturing at $1000 |
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What is a disadvantage of convertible bonds?
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-interest rate paid on the bonds is always lower than a non-convertible of the same quality
-not a suitable investment for those seeking income as a primary objective |
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money market
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-market for buying & Selling short-term funds in the form of securities & loans
-short-term loans that readily convertible into cash -buyer is the lender of the money -selling is borrower |
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What is maturity date of money market?
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-1 year or less
-some less than 6 months |
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Types of money markets
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-commercial paper
-bankers acceptances -certificate of deposit |
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commercial paper (money market)
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-short-term IOUs issued by corporations
-max maturity is 270 days -minimum denominations of $100,000 -sold to public & institutional investors |
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bankers acceptances (money market)
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-used to finance import/export businesses
-used extensively in international trade -"letter of credit" -bank guarantees payment on the draft |
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certificates of deposit (money market)
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-bank that issues CD redeems at face value on maturity date
-do not pay periodic interest interest paid in full at maturity -unsecured |
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negotiable CDs
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-must have face value of $100,000 or more
-also called Jumbo CDs |
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mortgage backed securities
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-debt obligations backed by a pool of mortgages
-have pass-through feature |
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Name the mortgage backed securities
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-Federal Home Mortgage Corporation (Freddit Mac)
-Federanl National Mortgage Association (Fannie Mae) -collateralized mortgage obligations (CMOs) |
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Federal Home Mortgage Corporation (Freddie Mac)
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-called a PC (participation certificate)
-comprised of FHOMC conventional residential mortgages on single-family homes -not backed by full faith & credit of US Govt -yeild generally higher than GNMA |
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Federal National Mortgage Association (Fannie Mae)
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-consist of some conventional mortgages & FHA insured mortgages
-not backed by full faith & credit of US Govt (would not permit them to default) -yield comparable to PCs -yield slightly higher than Ginnie Mae |
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collateralized mortgage obligations (CMOs)
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-bonds that collateralize by mortgages or by mortgage-backed securities
-issued with a stated maturity -as principal on mortgage being paid, used exclusively for the newest maturity in sequence until each maturity has been paid off -private mortgages, not qualified under FHA or VA |
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real estate mortgage conduits (REMICs)
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-entity that holds a fixed pool of mortgages
-issues multiple classes of interests in itself to investors -income is taxable to the holders of the interest |
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REMIC regular interest
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-interest in the REMIC, the terms of which are fixed when the REMIC starts & which unconditionally entitle the holder to receive a specified
principal amount -even if issued as stock, treated as debt instruments for federal income tax purposes |
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REMIC residual interest
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any interest that is not a regular interest
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REMIC residual interest holder
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-all income passes through as ordinary income & losses pass through as well
-there are limitations as to how much loss may be used to reduce taxable income -flow-through instrument |
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coupon and nominal
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interest rate
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What affects the interest rate on a bond (coupon factors)?
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-prevailing economic conditions
-issuer's credit rating--the higher the credit rating, the lower the coupon |
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What happens to bond price when interest rates go down?
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-prices on existing bonds go up
-sell at a premium -10s12 selling @ 7.00% yield to maturity -yield less |
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What happens to bond prices when interest rates go up?
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-Prices on existing bonds go down
-discount -6s09 selling @ 7.00% yield to maturity -yield more |
