Bond Basics
Corporate bonds are usually
- Term Bonds - Quoted on a percentage of par basis
Which of the following affect the marketability of corporate bonds?
-Bond Rating -Maturity -Block Size
Corporate bonds are quoted in
1/8ths
When quoting bonds on a yield basis, the difference between a bond priced at a yield of 5.45 and a bond priced at a yield of 5.55 is
10 Basis Points
U.S. Government bonds are quoted in
32nds
A railroad bond is a
Corporate Bond
Corporate bonds are quoted on what basis?
Dollar price
Market uncertainty regarding future interest rate levels would indicate that the yield curve should be
Flat
Zero-coupon bonds trade
Flat
A bond that was originally sold at par is now trading in the market at a premium. The bond is called at par. This action will benefit the
Issuer
Guaranteed Bond
One company issues the bond and, as an added measure of security, another company guarantees to pay it if the issuing company cannot
Income Bonds
Only the principal is promised; interest is paid only when the enterprise's earnings can cover the cost.
Debenture
a type of debt instrument that is not secured by physical assets or collateral - Good faith and credit
The yield curve shows the yields of
different maturities of the same type of security
A percentage of par quote is also known as a
dollar quote
An analysis of yield curves of U.S. Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. This is an indication that investors expect the economy to
enter a recession over the coming months If the yield "spread" between Government bonds and lower medium quality corporate bonds is widening, this means that yields on lower grade corporate bonds are higher than normal relative to yields on Government bonds. This occurs because an excess of investors are buying Governments, pushing their yields down; or an excess of investors are selling lower grade corporate bonds, pushing their yields up.
Exchange rate risk exists when making an investment in a
foreign security when the U.S. dollar strengthens This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening).
When a recession is expected
investors sell corporate bonds (increasing their yields) and buy government bonds (decreasing their yields). Thus, the spread between corporate and government bond yields will widen.
A rising rate of inflation would lead to
lower bond prices and higher bond yields
An increasing market rate of interest would lead to
lower bond prices and higher bond yields
The primary reason that services such as Moody's and Standard and Poor's provide bond ratings is to
measure default risk of different issues They only rate bonds, so no comparisons can be made with equity issues. They do not measure yields, nor marketability risk.
Most of the value of a bond is established by the:
present value of the last payment
Bonds quoted on a yield to maturity basis are generally
serial bonds
The yield to maturity for a discount bond is
stated interest rate + annual capital gain / bond average value
A bond issue where every bond has the same issue date, interest rate, and maturity is a
term bond offering