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Debt
pass the series 7
| Question | Answer |
|---|---|
| Bond | a debt security which obligates the issuer to pay interest (usually semi-annually) and to repay the principal amount when the debt matures |
| term bonds aka | dollar bonds |
| Corporate bonds % of par in 1/8's | ___________ bonds are quoted as a percentage of par value; with minimum changes of 1/8th point. |
| U.S.Government bonds % of par in 1/32's | ___________ bonds are quoted as a percentage of par value, with minimum changes of 1/32nd point. |
| Debenture | a long-term, unsecured corporate bond backed by the full faith and credit of the issuer. |
| Serial bond | a bond, usually a municipal bond, that is issued all at one time and then matures in installments over a number of years - hence, it has serial maturities. |
| Basis quote | a synonym for a yield-to-maturity quote . yeils basis |
| coupon | also known as the interest |
| Par for common stock | an arbitrary (and essentially meaningless) value assigned the shares at the time of issuance |
| par for preferred stock, | a share's fixed value upon which dividend payments are based - usually $50 par or $100 par |
| par for a bond | the fixed value (usually $1,000) upon which interest payments are based. Par value and face value are synonyms when applied to bonds. |
| Municipal serial bonds - quotes | _________________are quoted on a yield basis. In order to find the dollar price from a basis quote, a bond calculator must be used. |
| corporate and government bonds -quotes | __________&____________are quoted on a percentage of par basis because they are term bonds. Any municipal issues which are term bonds are also quoted on a percentage of par basis, and are known as dollar bonds. |
| Discount bond | when par value is greater than the bond's purchase price. |
| Premium bond | when par value is lower than the bond's purchase price. |
| secondary market - | the market which encompasses the entire trading market for issued securities. |
| Primary Market - | market for new issues sold for the first time to the Public |
| When interest rates RISE, bond prices FALL; | When interest rates FALL, bond prices RISE. |
| When you buy a bond at par, yield is _______ the interest rate. When the pricechanges, so does the yield. | equal to |
| what are the two payment components of bonds | the stream of interest payments over the life of the bond; and the final principal repayment. |
| yield to maturity | a more accurate and enables you to compare bonds with different maturities and coupons. |
| Bid Price - | This is the price someone is willing to pay for the bond. It is quoted in relation to 100, no matter what the par value is. Think of the bid price as a percentage: a bond with a bid of 93 is trading at 93% of its par value |
| Yield | indicates annual return until the bond matures. Usually, this is the yield to maturity, not current yield. If the bond is callable it will have a "c--" where the "--" is the year the bond can be called |
| Nominal Yield, | the stated rate of interest on the bond. The bond's stated rate of interest is 10% of $1,000 par. |
| Current Yield, | ________takes into account the market price of the bond. The formula for _____is: anual interest($$) / bond's market price |
| economic expansion | when monetary policy is loose |
| Purchasing Power Risk | The risk that inflation will lower the value of bond interest payments and principal repayment, thereby forcing prices to fall. |
| Marketability Risk: | The risk that the security will be difficult to sell. Many factors affect marketability: the issue's size, the number of traders in the market, etc. |
| Liquidity Risk: | The risk that the security can only be sold by incurring large transaction costs. Generally, short-term high quality issues are liquid; the longer the term and lower the quality, the lesser the liquidity. |
| Legislative Risk: | The risk that new laws reduce the value of a security, such as a change in the tax laws increasing tax rates on interest received from debt investments. |
| Legislative Risk: | The risk that new laws reduce the value of a security, such as a change in the tax laws increasing tax rates on interest received from debt investments. |
| Call Risk: | The risk that the bonds may be redeemed prior to maturity,forcing reinvestment of proceeds@a lower interest rate.this risk increases as interest rates fall in the market |
| Reinvestment Risk | The risk that, as payments are received from an investment, interest rates have fallen. When the funds are reinvested, the investor receives a lower yield. |
| ascending yield curve | The "normal" shape of the yield curve shows that as maturities lengthen, yields increase. |
| yields - maturities | As a general statement_____ increase as ____ lengthen because investors demand a premium for the extra risk associated with longer term maturities (both interest rate risk and purchasing power risk). |
| "flattens out" | The yield curve now _______________ as short-term rates rise closer to long-term levels. |
| Inverted yield curve (descending) | If the Federal Reserve really tightens short-term credit to slow the economy, then short-term rates can rise above long-term rates. |
| An ascending curve occurs | (curve) during periods of normal economic expansion; |
| A flat curve occurs | (curve)when the economy is peaking; |
| An inverted curve occurs | (curve)when short-term credit is severely tightened if the economy is "overheating." To slow things down, the Fed raises short-term rates to extremely high levels. |
| Liquidity Preference: | states that investors prefer liquidity; and that because of this, short term issues (which are more liquid) should trade at lower yields than long term issues. Thus, the "normal" curve under this theory is an ascending yield curve. |
| Market Segmentation (thoery): | states that individual and institutional investors are restricted to making investments in specific maturity sectors. Under this theory, the yield curve simply shows the relative supply and demand for issues in each maturity range. |
| Expectations(thoery): | states that the shape of the yield curve shows investor expectations as to the future direction of interest rates.A positive curve indicates that investors expect interest rates to rise.negative "rates will fall" flat curve;"no change" |
| Municipal dollar bonds are generally: | term bonds |
| Corporate bonds ans US Gov bond issues are usually _____bonds | term bonds - all bonds of an issue having the same interest rate and maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a "dollar" quote. |
| term bonds are quoted on a _____ _ ___basis | percentage of par |
| The nominal yield | The ____ yield is the stated rate of interest as a percentage of par value. It does not change as bond prices move. |
Created by:
PAJAAM81