Series 7 Chapter 2

Front 1

bonds

Back 1

loans to an organization , do not represent ownership, but represent debt securities, investor is creditor who receives interest paymeny

Front 2

Bonds are loans made in increments of *blank*

Back 2

1000 dollars, par value or principal of bond is 1000

Front 3

coupon rate

Back 3

interest rate of a bond, predetermined fixed rate that is a percentage of the par value of bond, paid semi-annually

Front 4

bond maturity date

Back 4

date that loan/bond must be repayed to investor

Front 5

3 ways bonds can be traded

Back 5

discount (market price is less than par value), par (market price is 1000), premium (market price is more than par value)

Front 6

series bonds

Back 6

different issue dates & usually the same maturity date, generally used for projects with various stages

Front 7

term bonds

Back 7

entire issue of bonds that all have the same maturity date

Front 8

sinking fund

Back 8

represents money set aside to redeem the company's bonds, debentures, or preferred stock- may be a mandatory debt retirement provision of a bond indenture which adds safety but reduces yield

Front 9

serial bonds

Back 9

issue of bonds that have one issue date and staggered maturity dates scheduled at regular intervals until issue is fully paid, interest costs would progressively go down over the life of the bonds as shorter maturity bonds retire

Front 10

balloon maturity

Back 10

term that describes a bond issue w/ a large amount of issue that comes due at or near final maturity date

Front 11

funded debt

Back 11

corporate debt that is due more than one year from the issue date (includes bonds, notes, bank loans) does not include stock or gov/municipal bonds

Front 12

3 ways bonds are issued

Back 12

registered (registered in investors name and interest payments are sent directly to the investor by the corporation's paying agent, principal is sent directly to owner at maturity, all bonds are currently registered), bearer (not registered in investor's name, have interest coupons, bonds are no longer issued in this form), "as to principal only" (registered w/ investors name w/ interest coupons, bonds no longer issued in this form), "book entry form" (ownership is electronic)

Front 13

3 basic bonds

Back 13

corporate, government, municipal

Front 14

Corporate bond

Back 14

taxable at federal/state/local level, riskiest, highest coupons, highest yield, subject to SEC registration, quoted in dollars in 1/8ths as a % of par ex 98 1/8

Front 15

Government Bond

Back 15

taxable at federal level only, safest, mid-range coupon, lowest yield, not subject to sec registration, in dollars in 1/32nds as 5 of par ex 98.16

Front 16

Municipal bonds

Back 16

usually taxable at state/local level, moderate risk, lowest coupon, middle yield, not subject to sec registration, in dollars in 1/8ths as 5 of par or yield to maturity ex 98 1/8th or 4.38%

Front 17

Bond's yield

Back 17

actual rate of return which an investor receives, takes into account purchase price & interest payments & redemption value of bond...bond at discount (yield > coupon), bond at par (yield = coupon), bond at premium (yield < coupon)

Front 18

nominal yield

Back 18

another term to describe the coupon (interest rate) of a bond, fixed amount of annual income an investor will receive from a bond

Front 19

current yield

Back 19

measurement that takes bonds current market value and coupon into account (annual interest divided by current market price)

Front 20

yield to maturity or basis

Back 20

long term yield on bond that is expressed as an annual rate- takes into account purchase price, redemption value, coupon rate, and time to maturity

Front 21

changes in yield are measured in *blank*

Back 21

basis points, basis point is 1/100th of a point or 0.01% of the $1000 par value, change of 1% in yield of a bond is equal to 100 basis points, M is the roman numeral for 1000 and signifys dollar value of quantity of bonds

Front 22

long term maturities

Back 22

more price will decline when interest rates rise, when interest rates change these react the greatest, riskier, if interest rates go down invest long term

Front 23

short term maturities

Back 23

when interest rates changes prices of short term react the quickest, if interest rates go up invest short term

Front 24

dollar value of bond formula

Back 24

quoted price times 10 dollars

Front 25

leveraged buy-out

Back 25

takeover of a company using borrowed funds

Front 26

spin-off

Back 26

corporate divestiture that results in the subsidiary of a company becoming an independent company operating on its own

Front 27

holding company

Back 27

corp that owns enough of the voting shares of another corp that it can influence the company's policies, management, board

Front 28

trust indenture act of 1939

Back 28

fed act that requires all corp bonds and debentures be issued under an indenture or deed of trust, bond indenture is a doc that specifies rights and duties of the issuer/underwriter/investor. issuer must appoint a trustee who will represent & protect the bondholders & their interests in the event of a conflict of interest or default

Front 29

accrued interest

Back 29

amount of interest built up since the issuer last made an interest payment & the time the investor buys the bond, when bond is purchased current market price is paid along w/ accrued interest

Front 30

calculating accrued interest

Back 30

calculated on 30 day month/360 day year, paid up to but not including settlement date, issuers normally make interest payments on 1st and 15th of month- on the 1st of a month you add 30 days of remaining interest & on the 15th of a month you add 16 days of interest

Front 31

mortgage bond & 3 types

Back 31

corporate bond: instrument of debt secured by a mortgage on the real property owned by issuing corp (closed-end, open-end, general)

Front 32

closed-end mortgage bonds

Back 32

property used to secure the loan cannot be used as collateral to secure other future loans, unless subsequent loans are lesser in claim

Front 33

open-end mortgage bonds

Back 33

property can be used to secure subsequent loans & all debts hold equal claims against the assets. since all debts hold equal claim, this creates more risk & higher yield

Front 34

general mortgage bonds

Back 34

pledges all mortgageable properties of a corp as collateral but does not have any specific lots

Front 35

equipment trust certificate

Back 35

corporate bond: generally issued by transportation companies to purchase new equipment, bonds are secured by new equipment, trustee holds title to equipment until bonds are paid at maturity, bonds are usually not callable, issued in serial form, rarely ever default

Front 36

collateral trust certificate

Back 36

corporate bond: uses securities of other corps that issuer owns as collateral. securities are placed on deposit with a trustee, generally issued by parent corps that use securities of a wholly owned subsidiary as collateral

Front 37

debenture

Back 37

corp bond: backed by "good faith and credit" of issuing corp only, unsecured debts w/ no collateral

Front 38

subordinated debenture

Back 38

corp bond: holds a lesser or "junior" claim than other debenture bonds & would be paid only after higher level debenture claims had been satisfied

Front 39

junk/high yield bonds

Back 39

corp bond: issued by companies w/ out a long track record of sales/earnings, more volatile, higher yields, sometimes finance corp takeovers

Front 40

fallen angels corp/junk bonds

Back 40

originally "investment grade" bonds but downgraded to junk bond rating

Front 41

income/adjustment bonds

Back 41

corp bond: often issued by companies in financial difficulty to avoid bankruptcy, promise to pay interest only if they have sufficient earnings & board of directors declares interest will be paid, principal due at maturity, bonds normally trade flat (no accrued interest), risky

Front 42

parity bonds

Back 42

corp bond: have equal claim or rights as other bonds previously issued

Front 43

zero coupon bonds

Back 43

corp bond: sold at deep discount, pay no interest while the bonds are outstanding, no semi-annual or accrued interest, increase in value by means of accretion (imputed/implied interest), pay 1 lump some at maturity, produce phantom income- bondholders are still taxed annually, purchased by investors wanting to accumulate capital, most volatile of all fixed income securities

Front 44

callable bonds

Back 44

bonds can be redeemed early at option of issuer at a pre-established premium price after a specified date, call features are advantageous, call protection is the fixed time period when bonds may not be called- bondholders want interest rates to decline during this time, bonds and preferred stock may be callable

Front 45

callable bonds: "when it calls"

Back 45

bondholder receives "call premium" plus accrued interest, premium is amount paid on top of the par value of the bond as additional compensation for the early redemption, credit worthiness of company improves, debt to net worth ratio improves, interest rates stop after bond is called

Front 46

Callable bonds: notice of call

Back 46

issuer must give investor notice of call stating the date the bonds will be received, investors during this time may: (convert the bonds, sell bonds, or wait for redemption date)

Front 47

partial call

Back 47

only part of the issue is redeemed, bonds which are called are selected on a random basis from the entire issue

Front 48

convertible bonds

Back 48

convert to shares of common stock at the option of the bondholder, converted at a specified rate called conversion price (tells you how many shares of common stock the investor receives after conversion), some have anti-dilution clause (requires the conversion price of the bond be reduced when stock dividend is paid or stock split happens)

Front 49

Formula to calculate number of common shares upon conversion:

Back 49

par value divided by conversion px

Front 50

forced conversion

Back 50

issuers can force conversion of callable securities by issuing a call price that is below parity price of common stock, would cause investors to convert rather than tender their securities at call

Front 51

refunding

Back 51

sale of a new issue of bonds, used to retire an outstanding issue, outstanding bonds are replaced w/ new bonds-issuer would refund bonds (for a sharp decline in interest rates or if the company wanted to reduce the prospective dilution effect on common stock shares for converted bonds)

Front 52

calculating parity price

Back 52

parity price (price when convertible and common are worth the same)

Step 1. Calculate # of common shares produces= par value divided by conversion price......par value is $100 for convertible preferred, $1000 for convertible

Step 2. use shares produced from conversion to determine parity price of common= market price of preferred divided by common shares OR common shares times market price of common= parity price of preferred or bond

Front 53

collateralized mortgage obligation

Back 53

bond secured by pool of mortgage loans, provide secure income to investors on monthly basis