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74 Cards in this Set
- Front
- Back
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zero coupon bond |
-stated par value -no interest payments -issued at discount and mature at par |
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Term Bonds |
- issue and mature on the same date ex: treasury and corporate |
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Serial Bonds |
-issued on the same date and mature on different dates ex: Munis and Equipment Trust Certificates |
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Series Bonds |
-issued on different dates, but mature on different dates. ex: construction project |
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Price Quote: Term Bonds |
-% of Par |
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Price Quote: Corporate Bonds |
-Term Bond -% of Par - 1/8 point |
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Price Quote: Treasury Securities |
-Term Bond -% of Par -1/32nd |
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Price Quote: Munis |
-Serial Bond -Yield Basis or Basis Quote -105.6 105.6% of 100% of par |
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Formula: Current Yield |
=Annual Income/ (S) |
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Bond Level |
YMCA |
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Bond Components |
1. Interest Payments 2. Principal Payment |
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Price Volatility |
Long: longer the maturity the great the P volatility Low: the lower the cv the greater the bond P volatility Deep: deeper the discount the greater the P volatility |
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Macaulay Duration |
- a measure of a bonds price volatility -duration is the weighted average term to maturity |
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Call protection |
-the number of years an investor has before the issuer can call on the bonds |
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Interest Rates: Call/Puts |
(i) decrease it is more likely that the issuer will call on the bond (i) increase it is more likely that the investor will put the bond to the issuer: the bondholder is able to reinvest in bonds with higher interest rates |
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Market Price Floor |
Set by Puts: - if the market price were to fall below the Put value then investors would buy up the bonds until the price would readjust at a higher price |
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Credit Risk |
-risk that the issuer cannot make interest and principal payments -why we have credit rating agencies * refer to the chart on pg. 14 |
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Interest Rate Risk |
-risk that rising interest rates will cause the bonds value to fall. -not applicable to variable rate bonds or common stock |
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Purchasing Power Risk |
-Risk that Inflation will lower the value of the bond -Most significant in long term bonds |
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Marketability Risk |
-risk that bond will difficult to sell because there is a limited market for the security -major concern for munis |
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Liquidity Risk |
-risk that the bond will not be able to be sold without a large transaction cost -longer the term lower the quality higher the risk |
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Legislative Risk |
-risk that new laws reduce value |
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Reinvestment Risk |
-risk that interest payments that are received can only be reinvested into lower yielding securities due to drop in interest rates -not applicable to zero coupon bonds |
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Exchange Rate Risk |
-risk that foreign currency that the bond is denominated in loses value |
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Yield Curve |
-shows market rates of interest for bonds of different maturities with similar credit ratings |
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Normal YC |
-yields are increases as maturity increase -investors demand a premium for the extra risk associated with the longer term -economic expansion -monetary policy is loosened |
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Flat YC |
-short term rates rise relative to long term rates -monetary policy is tightening to slow down growth and fight inflation -economy is peaking |
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Inverted YC |
-short term rates rise above long term rates -economy is over heating -short term credit has been severely tightened |
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Liquidity Preference Theory |
since investors prefer short term investments short term issues should have lower yields |
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Market Segmentation Theory |
-investors are restricted to making investments based off of when they need their money ex: pension funds buy long-term securities because they will need that money late in the future |
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Expectations Theory |
-yield curve shows investor expectations as to future interest rates -positive curve indicates that expectations that interest rates will rise!!!! |
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Yield Spread |
-the difference between AAA Corp yields and Government securities -widening indicates an oncoming recession -selling corp and retreating to gov
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Book Entry |
-transfer agent has the purchasers name and address -no physical certificate is issued |
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Trust Indenture |
-bond contract that states the interest rate, maturity, collateral, call or put provisions, and all relevant features -states if there is a compliance trustee -all Cbonds>50k must have a trust indenture |
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Transfer Agent |
-responsible for recording owners of bonds outstanding and transferring the ownership when a sale occurs |
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Funded Debt |
-long term corporate debt -issuer has the funds for a long time before the funds are due |
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Secured Cdebt |
-specific collateral is pledged -issued at lower rate since its safer |
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Open Ended Trust Indenture |
-corporation is allowed to issue more debt |
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Additional Bond Test |
-corporation must pass before issuing more debt -earnings before interest must be able to pay off the current debt and then some |
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Mortgage Bonds |
-most common cdebt -debt is backed by the corporation owned real estate |
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Equipment Trust Certificate |
-Cdebt backed by equipment owned by the corporation -common in transportation |
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Collateral Trust Certificate |
-backed by a portfolio of marketable securities ex: parent company pledges the securities of a subsidiary as collateral |
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Unsecured Corporate Debt |
- backed by the corps promise to pay |
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Commerical Paper |
-ucdebt -very short maturity (14-30days) -will not exceed 270 days -sold at a discount maturing at par -purchasers are large institutions -units of 100k |
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Debenture |
-ucdebt -intermediate and long-term cdebt back by the corporation's word -issued by blue chip high credit rated -and lower rated organizations |
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Guarantee Bond |
-debt is backed by a subsidiary company |
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Subordinated Debenture |
-holders agree to lower status than debenture in a corporate liquidation -paid after the prime debentures -sold at higher interest rates |
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Income Bonds |
(Adjustments Bonds) -issued when corp is about to go bankrupt -replaces bonds that have defaulted -corp is obligated to pay if has sufficient funds or returns to profitability -trades flat without accrued interest (because the bonds are not currently paying interest) |
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conversion ratio |
=Par Value of Bond / Conversion Price |
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parity price of bond |
= conversion ratio * stocks market price |
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Parity Price of Stock |
= Bond Market Value / Conversion Ratio |
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Retiring Corporate Debt |
redeemed at maturity or called on |
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Sinking Fund |
-money is deposited into fund periodically -funds are used to retire the debt at maturity or in intervals at the end of each year |
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Tender offer |
-the corporation buys back the debt from the investors |
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Refunding Debt |
-when interest rates drop a corporation may refinance at lower interest rates |
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Secondary Market |
-OTC |
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Bloomberg |
-electronic corp bond quotes are posted by services like Bloomberg -quotes in 1/8ths |
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TRACE |
-Trade Reporting and Reconciliation Engine -FIRA cbond trade reporting system -reported every 15mins of execution |
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Dealer Paper |
-paper bought from a dealer who initially bought the security from issuer |
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Direct Paper |
-paper bought directly from the issuer -the dealer is acting as an agent in selling the paper -quoted on a discount yield basis |
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Regular Way |
settles 2 days after trade date |
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Cash |
-settlement occurs same days as trade before 2:30 pm |
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Sellers Option |
-if a seller doesn't feel he can deliver the security by regular way the price can be dropped to obtain a buyer for the unusual delivery |
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When Issued |
-allows trading in securities before they actually exist. No established settlement date. -settlement is set be the exchange once the securities are physically issued |
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National Securities Clearing Corporation (NSCC) |
-Settle in the clearing house funds -National Securities Clearing Corporation (NSCC) responsible for almost all corporate and municipal security trades |
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FICC (Fixed Income Clearing Corporation) |
-clear the government debt |
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Accrued Interest |
- when a bond trade settles the buyer must pay the seller the purchase price plus and commission due to the broker plus any accrued interest *** interest is due because the new holder will receive the interest payment for the entire 6-month stretch!! *** -accrues up to but not including the settlement date *** 30 day / 360 day year bases*** |
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Odd First Interest Payment |
-bond is issued between interest dates -from issue date to the next closet 6 month period |
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Trading Flat |
-buyer pays accrued interest if the bond is currently making interest payments -defaulted, income, zero coupon bonds, and commercial paper all trade flat |
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Cbond Interest Tax |
-subject to both Fed and State taxes -taxable in the year the payment is made -two i payments are included on each year tax return |
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Cbond Interest Income Tax |
Interest Income Recieved from Bonds -max tax rate of 39.6% |
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Discount (tax) |
original issue discount bonds is interest income |
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Commercial Paper (tax) |
entire discount is included for that tax year |
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Claim Priority in Corporate Liquidation |
(1) Secured Bond Holders (2) Unpaid Wages, teaxes, and creditors (3) Debenture (4) Subordinated Debenture (5) preferred stock (6) common stock |
