Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
178 Cards in this Set
- Front
- Back
|
bondholders
|
have neither ownership interest in the issuing corporation nor voice in management. Receive preferential treatment if corp files for bankruptcy.
|
|
|
Funded debt
|
Corporate bonds with maturities of five years or more
|
|
|
municipal securities
|
the debt obligations of state and local governments and their agencies. Most are issued to raise capital to finance public works or construction projects that benefit general public
|
|
|
Coupon
|
Also the interest rate, calculated from the bond's par value
|
|
|
Par value or face value
|
is normally 1,000 per bond, meaning each bond will be redeemed for $1,000 when it matures
|
|
|
Maturity date
|
the loan principal is repaid to the investor on this day
|
|
|
5,000 x the interest of 8% (.08) divided by 2 because is semi annual = 5,000 + 200 or 5,200
|
What will investor receive at maturity of bond with 5M ABC J&J 15 8s of 09?
|
|
|
term bond
|
structured so that the principal of the whole issue matures at once
|
|
|
Serial bond issue
|
schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid
|
|
|
Balloon maturity
|
Elements of both serial and term maturity. The issuer repays part of the bond's principal before the final maturity date but pays off the major portion of the bond at maturity
|
|
|
Certificates
|
Physical evidence that designates the bond's ownership and characteristics: in essence an IOU.
|
|
|
Registered
|
What bonds are to record ownership should a certificate be lost or stolen
|
|
|
Registered bond
|
when issued, the issuer's transfer agent records the bondholder's name
|
|
|
Principal-only
|
No longer issued, coupons are in bearer form
|
|
|
Bearer bonds
|
issuers kept no records of purchasers and securities were issued without an investor's name printed on the certificate
|
|
|
Book entry
|
do not receive certificates. transfer agent maintains security's ownership records, bond owner does not receive a certificate, but the registered bond owner does
|
|
|
Fully registered or in book-entry form
|
Which form bonds must be in for an investor to receive interest and principal payments by mail
|
|
|
Face value
|
What bonds are generally issued with $1,000
|
|
|
Par
|
Represents the dolllar amount of the investor's loan to the issuer and it is the amount repaid when the bond matures
|
|
|
At par, below par, or above par
|
In the secondary market bonds can sell at these prices
|
|
|
1 point = $10
1 basis point = $.10 |
What are points and basis points equal to
|
|
|
Investment Grade
|
What a municipal bond must be , eg rating of BBB/Baa or higher
|
|
|
Bank - grade bonds
|
what investment grade bonds are also known as
|
|
|
Mood swings are Up and Down or upper and lower case letters
|
How to differentiate S&P and Moody's ratings
|
|
|
Higher a bond's rating the lower its yield due to safer principal and interest payments
|
what is relationship of rating to yield
|
|
|
US Government Securities
Government Agency Securities Municipal issues Corporate debt |
What is the comparative Safety of debt securities
|
|
|
General Obligation bonds (GOs)
|
backed by the taxing power of the issuer, are usually safer than revenue bonds
|
|
|
Junk bonds
|
Very risky corporate bonds
|
|
|
Liquidity
|
ease with which a bond or any other security can be sold
|
|
|
Marketability
|
What is another word for liquidibility
|
|
|
Debt Service
|
the schedule of interest and principal payments due on a bond issue
|
|
|
Redeemed
|
When a bond's principal is repaid
|
|
|
Sinking fund
|
Established by issuer to facilitate the retirement of its bonds.
Cash is deposited in an account with trustee to establish, aids bonds marketability |
|
|
Call feature
|
allows the issuer to redeem a bond issue before its maturity date either in whole or in part
|
|
|
Call premium
|
difference between call price and par , what issuers play bondholders when bond is called
|
|
|
Term bonds
|
generally called by random drawing
|
|
|
Serial bonds
|
called in inverse order of their maturities because longer maturities tend to have higher interest rates
|
|
|
Tendering
|
If a bond issue's trust indenture does not include a call provision isuer normally can buy bonds in the open market, to retire a portion of its debt
|
|
|
Call risk
|
when investors are faced with having to replace a relatively high fixed income investment with one that pays less
|
|
|
Call protection feature
|
an advantage to bondholders in periods of declining interst rates
|
|
|
Calls occur whe ninterest rates are declining
|
Under what economic circumstances do issuers call bonds?
|
|
|
Call risk is the risk that the bonds will be called and the investor will lose the stream of income from the bond. Bonds do not pay interest after they are called
|
Investors that purchase callable bonds face what types of investment risk
|
|
|
Refunding
|
the practice of raising money to call a bond
|
|
|
Refinancing
|
what is another way to think of refunding bonds
|
|
|
pre-refunded or advnace refunding
|
when a new issue of a bond is sold at a lower coupon before original bond issue can be called
|
|
|
Defeasance
|
termination of the issuer's obligation to a bond from advnace refunding
|
|
|
They are AAA rated (cannot get any safer)
They are considered defeased The funds are escrowed in government securities the marketability of pre refunded bond increases once pre refunded the issue is no longer considered part of the outstanding debt of the issuer |
what to know about pre refunded bonds
|
|
|
Tender offer
|
What a bond issuer may make for its outstanding bonds most likely at a premium price as an inducement to bondholders to tender their securities
|
|
|
Put or puttable
|
bonds issued with put options. In return for accepting lower interest rate, investor receives right to put or sell the bond to the issuer at full face value
|
|
|
Municipal bonds
|
Where are put features most commonly found
|
|
|
Yield
|
Of a bond that expresses the cash interest payments in realtion to the bond's value. Determined by issuer's credit quality, interest rates, time to maturity, and call features
|
|
|
Nomal or coupon yield
|
a fixed percentage of the bond's par value
|
|
|
Current yield (CY)
|
measures a bond's coupon payment relative to its market price
|
|
|
Coupon payment divided by market price = current yield
|
How to calculate current yield
|
|
|
Bond prices and yields move in opposite directions:
as interest rates rise, bond prices fall and vice versa |
What is relationship between bond prices and yields
|
|
|
$60 divided by $800 = 7.5%
|
What is current yield of a 6% bond trading for $800
|
|
|
When bonds are at par, coupon and current yield are equal.
when bonds are at a premium the CY is less than the coupon When bonds are at a discount, CY is greater than the coupon |
What is the inverse relationship between price and yield
|
|
|
Yield to maturity (YTM)
|
reflects the annualized return of the bond if held to maturity
|
|
|
Annual interest - (Premium divided by years to maturity) divided by averaage price of the bond
|
How to calculate YTM of bond
|
|
|
Basis
|
another term for yield to maturity
|
|
|
Yield to Call
|
reflect early redemption date and consequent acceleration of the discount gain or premium loss from the purchase price
|
|
|
Premium
|
If the bond has a YTC lower than its CY it is trading at
|
|
|
Par
|
If the bond has a YTM and CY that are equal, the bond is trading at
|
|
|
Discount
|
If the bond has a YTM less than its YTC the bond is trading at
|
|
|
Discount
|
If a bond has YTM greater than its coupon, the bond is trading at a
|
|
|
Discounts: YTC, YTM, CY, Nominal
Premiums: Nominal, CY, YTM, YTC |
What are the ranking yields from highest to lowest
|
|
|
Inverse relationship
|
As interest rates rise, prices decline
|
|
|
Yield curve
|
the difference in yields between short term and long term bonds of the same quality
|
|
|
Normal yield curve
|
difference between short term and long term rates is about 3 percentage points (300 basis points)
|
|
|
Inverted
|
When long term interest rates are lower than short term rates, the yield curve is considered
|
|
|
Recession
|
Expected when yield curve spread between corporate bonds and government bonds is widening
|
|
|
Expansion
|
expected when yield curve between corporate bonds and government bonds is narrowing
|
|
|
Choose bond with the deepers discount ie the lower coupon
|
If given two discount bonds and asked which will appreciate the most if rates fall?
|
|
|
The bond with the most distant call date
|
If given two callable bonds and asked which will appreciate the most if rates fall
|
|
|
Corporate bonds
|
issued to raise working capital or capital for expenditures such as plant construction and equipment purchases
|
|
|
Secured
|
a bond is this when the issuer has identified specific assets as colalteral for interest and principal payments
|
|
|
Default
|
The bondholder can lay claim to the collateral
|
|
|
Mortgage bonds
|
Have the highest priority among all claims on assets pledged as collatoral
|
|
|
Collateral trust bonds
|
issued by corporations that own securities of other companies as investments
|
|
|
another company's stocks and bonds
stocks an bonds of partially or wholly owned subsidaries pledging company's prior lien long-term bonds that have deld in trust to secure short term bonds installment payments or other obligations of the corporation's clients |
Collateral trust bonds may be backed by
|
|
|
Equipment Trust certificates (ETCs)
|
What railroads, airlines, trucking companies, and oil companies use to finance the purchase of capital equipment
|
|
|
Unsecured bonds
|
have no specific collateral backing and are classified as either debentures or subordinated debentures
|
|
|
Debentures
|
Backed by the general credit of the issuing corporation and owner is considered a general creditor of the company
|
|
|
subordinated debenture
|
claims are paid last of all debt obligations, in case of liquidation
|
|
|
un paid wages
IRS (taxes) secured debt (bonds and mortgages) Unsecured liabilities (debentures) and general creditors Subordinated debt preferred stockholders common stockholders |
What is the hierarchy of claims on the company's assets in even company goes bankrupt
|
|
|
Guaranteed bonds
|
backed by a company other than the issuer, such as a parent company. effectively increases the issue's safety
|
|
|
Income bonds/adjustment bonds
|
used when a company is reorganizing and coming out of bankruptcy
|
|
|
Zero coupon bonds (zeroes)
|
an issuer's debt obligations that do not make regular interest payments
|
|
|
investors in zeroes owe income tax each year on the amount by which the bonds have accreted just as if the investor had received it in cash
|
what should be known about taxation of zero coupon bonds
|
|
|
a Zero
|
What security has no reinvestment risk
|
|
|
Trust Identure Act of 1939
|
Requires corporate bond issues of $5 million or more sold interstate to be issued under a trust indenture, a legal contract between the bond issuer and a trustee representing bondholders
|
|
|
Trustee
|
What trust indenture act of 1939 requires a corporation to appoint, ussally a commercial bank or trust company, for its bonds
|
|
|
Senior lien bonds
|
Closed -end indenture bonds,
|
|
|
Closed end covenants
|
mortgage bonds that have senior claim on the underlying assets even if the corporation issues other bonds secured by same asset
|
|
|
open end covenants
|
permits subsequent issues to be secured by the same property and have equal liens on it
|
|
|
2.5
|
2.5
|
|
|
NYSE Bonds
|
provides investors with cost effective, real time automatic order execution
|
|
|
Convertible bonds
|
corporate bonds that may be exchanged for a fixed number of shares of the issuing company's common stock. Pay lower interest rates than nonconvertible bonds
|
|
|
convertible debenture
|
pays interest at a fixed rate and is redeemable for its face value at maturity, provided the debenture is not converted
|
|
|
conversion price
|
stock price at which a convertible bond can be exchanged for shares of common stock
|
|
|
conversion ratio / conversion rate
|
expresses the number of shares of stock a bond may be converted into
|
|
|
1,000 divided by 40 = 25:1 or 25 shares
|
Bond with a conversion price of $40 has a conversion ratio of what?
|
|
|
100 divided by 20 = 5 shares
|
How many shares can a convertible preferred stock derive that converts at $20
|
|
|
Parity
|
2 securities are of equal dollar value (convertible bond and common stock into which it can be converted)
|
|
|
Market Price of bond divided by conversion ratio (# of shares) = parity price of common stock
or Market price of common x conversion ratio = parity price of convertible |
How to calculate the parity prices of convertible securities and their underlying common shares
|
|
|
Rising market
|
the convertible's value rises with the common stocks value
|
|
|
Declining market
|
The conertible's market price tends to level off when its yield becomes ompetitive with the yiedl on nonconvertible bonds
|
|
|
Dilution
|
occurs when the percentage of ownership is lessened for an investor's ownership interest
|
|
|
antidilution covenant
|
convertible bondholders are protected by this found in trust indenture
|
|
|
Forced conversion
|
occurs when an issuer calls its convertible bonds and it is clearly in the best interest of bondholders to convert their bonds rather than let them be called away
|
|
|
Par value ($1,000) divided by conversion price $40 = 25 common shares
Would need to receive 10% more shares or 27.5 shares to stay even. $1,000 divided by 27.5 = 36.36 the new conversion price |
A convertible bond is issued with a conversion price of $40. if the issuer declares and pays a 10% stock dividend, what is the new conversion price?
|
|
|
2.6
|
2.6
|
|
|
Book-entry from
|
most government securities issued in this form, meaning no physical certificates exist
|
|
|
Treasury securities
|
classified as bills, notes, and bonds to distinguish an issue's term to maturity
|
|
|
T-bills
|
short term obligations issued at adiscount from par
|
|
|
T-notes
|
Unlike treasury bills, these pay interest every 6 months. Sold at auction every 4 weeks
|
|
|
Refunded
|
T-note can mature at par or be this and governemtn offers the investor a new scurity with a new interest rate and maturity date
|
|
|
T-bonds
|
long term securities that pay interest every six months
|
|
|
Treasury receipts
|
A type of zero coupon bond that brokerage firms create from US treasury notes and bonds
|
|
|
STRIPS Separate Trading of Registered Interest and Principal of Securities
|
Treasury issues designated suitable for stripping into interest and principal components. Backed in full by the US government unlike receipts
|
|
|
TIPS Treasury Inflation Protection Securities
|
Type of treasury issue helps protect investors against purchasing power risk
|
|
|
Consumer Price Index (CPI)
|
Standard measurement of inflation
|
|
|
Tips, offer inflation protection and safety of principal
|
Consumer wishes to buy a security providing periodic interest payments, safety of principal and protection from purchasing power risk customer should purchase
TIP TIGRS CMOs STRIPS |
|
|
GNMA Government National Mortgage Association
|
government owned corporation that supports the department of housing and urban development
|
|
|
Prepayment risk
|
the risk that the underlying mortgages will be paid off earlier than anticipated
|
|
|
Extended maturity risk
|
risk that the underlying mortgages will remain outstanding longer than anticipated
|
|
|
FCS Farm credit system
|
national network of lending institutions that provides agricultural financing and credit
|
|
|
FHLMC Federal Home Loan Mortgage Corporation
|
public corporation created to promote the developemtn of a nationwide secondary market in mortgages by buying residential mortgaes from financial institutions and packaging them into mortgage
|
|
|
Pass-through
|
refers to the mechanism of passing homebuyers' interest and principal payments from the mortgage holder to investors.
|
|
|
PCs mortgage participation certificates
|
make principal and interest payments once a month
|
|
|
GMCs guaranteed mortgage certificates
|
make interest payments twice a year and principal payments once a year
|
|
|
FNMA Federal national mortgage association
|
publicly held corporation that provides mortgage capital
|
|
|
GNMAs
|
What agency instrument is backed in full by the US governemnt
|
|
|
Student Loan Marketing Association (Sallie Mae)
|
issues discount notes and short term floating rate notes
|
|
|
Competitive bids
|
those placed by primary dealers in US governemtn securities
|
|
|
Noncompetitive bids
|
placed by other market participants
|
|
|
Stop out price
|
price bidders pay is the lowest accepted competitive bid called this
|
|
|
Dutch Auction
|
When the highest bid is accepted first and on down the line until $20 billion has been accepted, the lowest accepted bid is the price all bidders will pay
|
|
|
Coupon dates
|
Payment dates where bonds pay interest
|
|
|
Dated date
|
date from which interest accrual begins
|
|
|
Principal x interest rate x elapsed days divided by 360 days
|
How to calculated accrued bond interest
|
|
|
Trading flat
|
term used to describe a situation in which a bond trades without accrued interest
|
|
|
CMOs Collateralized Mortgage Obligations
|
Type of asset backed security
|
|
|
Asset backed security
|
ones whose value and income payemtns are derived from or backed by a sepcific pool of underlying assets
|
|
|
tranches
|
pool of mortgages is structured into these maturity classes
|
|
|
Plain vanilla CMO
|
CMO that pays interest on all tranches simultaneously
|
|
|
PSA Public Securities Association
|
CMO's yield and security are based on historical data from here
|
|
|
POs Principal only CMOs
|
The income stream comes from principal payments on the underlying mortgages
|
|
|
IOs interest-only CMOs
|
by product of pos, receive the interest
|
|
|
Extension risk
|
the chance that principal payments will be slower than anticipated
|
|
|
Stability statement
|
What customer is required to sign before buying any CMO
|
|
|
-CMOs not backed by US government, corporate instruments
-interest paid is taxable at all levels -CMOs are backed by mortgage pools CMOs yield more than US treasury securiities CMOs are subject to interest rate risk CMOs are issued in $1,000 denominations and trade OTC PACs have reduced prepayment and extension risk TACs are protected against prepayment risk but not extension risk PACs have lower yields than comparable TACs |
what is good to know about CMOs?
|
|
|
CDOs Collateralized debt obligations
|
typically complex asset-backed securities, portfolios consist of non mortgage loans or bonds
|
|
|
HH Bonds
|
issued at face value and pay interest every six months at a fixed rate
|
|
|
I Bonds
|
designed for investors seeking to protect the purchasing power of their investment and earn a real rate of return
|
|
|
Capital market
|
serves as a source of intermediate term to long term financing usually in the form of equity or debt securities with maturities of more than one year
|
|
|
Money market
|
provides very short term funds to corporations, banks, broker/dealers, and the US government
|
|
|
REPO repurchase agreement
|
financial institution such as a bank or broker/dealer, raises cash by temporarily selling some of the securities it holds with an agreement to buy back the securities at later date
|
|
|
Open repo
|
if maturity date is left to the initial buyer's discretion, the repo is know as
|
|
|
Repo rate
|
Loan's interest rate is negotiated between 2 parties and generally lower than bank loan rates
|
|
|
Reverse Repo
|
dealer agrees to buy securities from an investor and sell them back later at a higher price
|
|
|
BA banker's acceptance
|
short term time draft with a specified payment date drawn on a bank
|
|
|
Federal Reserve Bank FRB
|
Banker's frquently use banker's acceptances as colalteral against these loans
|
|
|
Commercial paper
|
Interest rates these have are lower than bank loan rates. Short term and unsecured to raise cash to finance accounts receivable and seasonal inventory gluts
|
|
|
Direct paper
|
commercial paper sold by finance companies directly to the public without the use of dealers
|
|
|
Dealer Paper
|
commercial paper sold by issuers through dealers
|
|
|
CDs
|
fixed interest rates and minimum face values
|
|
|
Federal funds rate
|
the rate the commercial money center banks charge each other for overnight loans of $1 million or more
|
|
|
prime rate
|
interest rate that large US money center commerical banks charge their most creditworthy corporate borrowers for unsecured loans
|
|
|
discount rate
|
the rate the Federal Reserve charges for short term loans to member banks
|
|
|
Broker loan rate
|
interest rate banks charge broker/dealers on money they borrow to lend to margin account customers
|
|
|
Eurodollars
|
US dollars deposited in banks outside the US that remain in US dollars rather than local currency
|
|
|
Eurobond
|
any long term debt instrument issued and sold outside the country of curency in which it is denominatedy
|
|
|
Interbank market
|
developed as a means of transacting business and trading, lending and consolidating foreign currency deposits
|
|
|
exchange rate
|
rate at which one currency can be converted into another
|
|
|
Appreciating
|
currency is rising in value in comparison to other currencies on the foreign exchange market
|
|
|
depreciating
|
when currency falls in value on the foreign exchange market
|
|
|
Floats
|
when the exchange rate between currencies changes
|
