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39 Cards in this Set

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Bonds are issued by?
-Corporations

-State & Local Gov't & their agencies (Municipals)

-Federal Gov't & its agencies (US Gov't Debt)
Principal
Amount that an issuer will repay to the bond holder when bond matures.

Amount owed @ maturity is also referred to as the par value of the bond.
Coupon
Rate of interest paid on the bond & is also referred to as the Nominal Yield.

Rate of return which is set @ issuance & does not change.

Interest payments are semi-annually.
Zero-Coupon Bonds
Pay no semi-annual interest.

Issued @ a deep discount & mature @ par.

Difference between the price paid & par is considered to be the interest.
Maturity Date
Date on which the last semi-annual interest payment is made & the principal is paid back.
Types of Bonds
1) Bearer Bonds

2) Registered as to Principal only

3) Fully registered

4) Book Entry
Bearer Bonds
-Physical certificate is issued.

-Coupons representing interest payments are attached & must be redeemed to receive interest payments.

-Interest & principal payments are NOT registered

-NO record of ownership is kept by the issuer

-NO longer issued
Registered as to Principal Only
-Principal & interest payments are registered.

-Interest payments are in bearer form.
Fully Registered
-Principal & Interest payments are registered

-Physical certificates are still issued
Book Entry
-Principal & Interest payments are registered.

-No physical certificates are issued.

-All records are kept on a computer.
Types of Bond Issues
1)Term Issues (Dollar Bonds)

2)Serial Issue

3)Series Issue
Term Issues (Dollar Bonds)
-SAME issuance, coupon, maturity

-Most corporate & gov't bonds
Serial Issue
-Same issuance, Differing coupons, differing maturities

-Longer maturities = higher coupons

-Balloon Maturity: Most of the issue will be maturing @ one time.

-MOst municipal bonds
Series Issue
-Differing issuance, Same maturity, Differing coupons

-Earlier issuance = Higher coupons

-Long term construction projects
Dollar Pricing
-Expressed as a % of par

-Most term issues are quoted this way

-Corporate bonds are quoted in eighths

-Gov't notes, bonds & agencies are quoted in 1/32nds
Yield Pricing

Yield Basis

Basis Quote

Yield to Maturity
-Most municipals are quoted

-Quoted on basis points
*1 basis point = .01% of par (10 cents)
*10 basis points = .1% of par ($1)
*100 basis points = 1% of par ($10)

-Basis points are an expression of yields
Bond Yields
-Bond prices & interest rates have an INVERSE RELATIONSHIP.
When one goes up, the other goes down.

-Yields move in the manner represented on the bond see-saw.
Yield to Call
Yield on the bond if the issuer redeems the bonds prior to maturity

Usually the issuer will call the bond @ premium to bond's par value
Yield to Maturity
Yield on the bond if the issuer redeems the bond on its maturity date @ par value.

Most important because of "time value" of money
Current Yield
Used as a measure of how much interest payment is worth compared to the current market price of the bond.
Formula: Current Yield
Annual Interest Payments / Market Price = Current Yield
Nominal Yield
Stated coupon on the bond.

Yield will NEVER change unless the issuer is permitted to change the bond's coupon.
Worst Case Pricing
Quote either

Yield to Call

Yield to Maturity
Discount Bonds
Yield to Call would be the higher yield

If bond is NEVER CALLED, then it's Yield to Maturity is lower.

ALWAYS QUOTE @ the lower Yield to Maturity
Premium Bonds
Yield to Maturity would be the higher yield

If Bond is CALLED, then it's yield would be Yield to Call which is lower.

MOST OFTEN, quote Yield to CALL
The Yield Curve
Short term bonds have lower yields, while longer term bonds have higher yields.
Inverted Yield Curve
Occurs during troubled economic times

During Inflation, Feds tighten up money supply, where Short term maturities will actually yield more than long term maturies.

Feds are trying to take money out of system by making short therm borrowing less attractive.
Yield Rules
1) Short term yields fluctuate more than long term yields

2) Long term bond prices fluctuate more than short term bond prices

3) Discount bond prices fluctuate more than premium bond prices

4) If bonds are of equal maturity, then the one with lower coupon will have the greater price votality. Long term low yielding discount (Zero Coupons) bonds are the most volatile
Interest Rate Risk
Rising interest rates will cause bond prices to fall

Long term deep discount bonds are most susceptible
Purchasing Power Risk
Inflation will lower the value of interest & principal payments causing bond prices to fall
Marketability Risk

Liquidity Risk
Some bonds may be more difficult to sell

Small thinly traded issues are most susceptible

Short term + High quality = very liquid

Long term + Low quality = less liquid
Legislative Risk
New laws may adversely affect bond holders, i.e. TAX LAWS
Call Risk
When interest rates are low, bond prices are higher.

Issuers may take advantage of this situation by calling in their bonds early during periods of low interest rates
Reinvestment Risk
When interest rates fall, interest payments & principal payments will have to be reinvested into lower yielding issues.
Credit Risk
A measure of the issuer's ability to pay interest & principal payments in a timely fashion.

When an issuer's credit rating is lowered, their outstanding bonds will fall in value.
Bond Ratings - Investment Grades
1) Standard & Poor's

2) Moody's
Callable Bonds
-Allow the issuer to retire the bonds prior to maturity date.

-Bonds are more likely to be called during periods of low interest rates.

During low interest rate periods, issuers can issue new bonds @ lower rates; thereby reducing their debt service.

Trust Indenture: Provisions of the Call

Sinking Fund: Account where the issuer makes annual deposits that would be used to retire the bonds.
Call Protection
Certain period of time after the bond's issuance when it can not be called (Usually the 1st 5 to 10 years).

Call Premium: Amount paid above par
Puttable bonds
Some bonds allow the holder to sell (put) the bond back to the issuer.

Typically found on bonds which reset their coupons every year.

Some allow the bond holder to redeem the bond with the issuer for cash if the coupon is lowered, rather than lower interest payments.