Debt - SIE

If a bond is purchased at a discount, will Yield to maturity be higher or lower than current yield?

Yield to maturity will always be higher than current yield for a discount bond because YTM includes the earning of the discount as part of the overall return received from the bond while current yield ignores this component (it is simply Annual Income / Current Market Price).

Accretion

a growth in size; an increase in amount

When a bond increases in value due to market demand, this is termed:

appreciation

Serial bond

bonds of a single issue that mature on different dates

If market rates of interest increase, bonds issued at par would trade at (a):

discount

A bond call premium is the amount:

the price above par at which the issuer has the right to call in the bonds from the bondholders.

Amortization

the reduction of a loan balance through payments made over a period of time

The nominal yield of a bond is _____ by market interest rates.

unaffected

How is a basis point shown as a percentage?

A basis point is a measure of yield on a debt instrument. 1 basis point equals .01% of $1,000 par = $.10 of annual interest 10 basis points equal .1% of $1,000 par = $1.00 of annual interest 100 basis points equal 1% of $1,000 par = $10 of annual interest

What is a dollar bond?

A bond that is quoted in terms of its dollar price instead of its yield to maturity.

How are commercial paper's rated?

Commercial paper is rated P1, P2, P3, NP (highest to lowest) by Moody's. P stands for prime. NP means "not prime" and is the lowest rating.

Moody's ratings measure what type of risk?

Moody's measures default risk of debt issues. Moody's only rates bonds, not equity securities.

TRUE or False. Long term bond prices are more volatile than short term bond prices as interest rates move. Thus, short term bond prices are more stable (move more slowly) as interest rates change compared to long maturities.

TRUE. Short term bond prices move more slowly than long term bond prices

For bonds trading at a discount, rank the yield measures from lowest to highest? A Nominal; Current; Yield to Maturity; Yield to Call B Yield to Call; Yield to Maturity; Current; Nominal C Yield to Maturity; Nominal; Yield to Call; Current D Current; Nominal; Yield to Call; Yield to Maturity

The best answer is A.

The yield to maturity of a bond: A increases as bond market prices decline B increases as bond market prices increase C is unaffected by changes in market interest rates D will vary with the earnings of the issuer

The best answer is A. Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond falls, the Yield to Maturity must rise. Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond rises, the Yield to Maturity must fall.

If a bond is purchased at a discount, which statement is TRUE? A Yield to call is higher than the yield to maturity B Yield to call is equal to the yield to maturity C Yield to maturity is equal to current yield D Yield to maturity is lower than the current yield

The best answer is A. When a bond is purchased at a discount and called prior to its redemption date, the yield to call received will be higher than if the bond is held to maturity since the discount will be earned faster.

For bonds trading at a discount which yield would be the lowest? A Nominal B Current C Basis D Yield to Call

The best answer is A. When bonds are trading at a discount, the stated (nominal) yield will be lowest.

For bonds trading at a discount, rank the yield measures from lowest to highest? A Nominal, Current, Basis B Current, Basis, Nominal C Basis, Current, Nominal D Basis, Nominal, Current,

The best answer is A. When bonds are trading at a discount, the stated (nominal) yield will be lowest. The current yield will be higher, since it is based on the discounted market price - not par value. The yield to maturity will be the next highest, since it includes the portion of the discount earned annually as part of the annual return in addition to the interest received.

The highest speculative grade rating is: A) BBB B) BB C) B D) CCC

The best answer is B. The highest speculative bond rating is BB or Ba. Any rating above that would be considered investment grade.

Municipal dollar bonds are generally: A term bonds B series bonds C serial bonds D short term maturities

The best answer is A. Municipal dollar bonds (quoted on a percentage of par basis) are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

The current yield of a bond will: A increase as bond prices fall B increase as bond prices rise C remain unchanged as bond prices rise or fall D always equal the bond's nominal yield

The best answer is A. The current yield is the stated rate of interest as a percentage of the bond's market value. As bond prices fall, the current yield increases; as bond prices rise, the current yield decreases. Current yield will only equal nominal yield when a bond is trading at par.

An investor who expects interest rates to drop would invest in: A short term issues B puttable debt issues C callable debt issues D debt issues with adjustable interest rates

The best answer is B. If interest rates decline, it is likely that issuers will call in outstanding bonds and refund the issues at the lower current interest rates. An investor who expects interest rates to drop should avoid callable issues or issues with adjustable interest rates (since each year as interest rates drop, the rate on the bond is dropped).

An issuer would MOST likely call bonds with: A low coupon rates B high nominal yields C high call premiums D long call protection period

The best answer is B. The bonds which are most likely to be called are bonds with high nominal yields, which is the same as the coupon rate. After calling the bonds, the issuer can refund the issue at lower current market rates (given that interest rates have fallen after issuance).

If a bond is purchased at a If a bond is purchased at a premium which statement is TRUE? A Yield to call is equal to yield to maturity B Yield to call is lower than the yield to maturity C Yield to maturity is higher than the current yield D Yield to maturity is equal to the current yield

The best answer is B. When a bond is purchased at a premium and called prior to its maturity date, the yield to call received will be lower than if the bond is held to maturity since the premium will be lost faster.

For bonds trading at a premium, rank the yield measures from lowest to highest? A Nominal; Current; Yield to Maturity; Yield to Call B Yield to Call; Yield to Maturity; Current; Nominal C Current; Nominal; Yield to Call; Yield to Maturity D Yield to Maturity; Current; Yield to Call; Nominal

The best answer is B. When bonds are trading at a premium, the yield to call will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond to the call date. The next highest yield will be the yield to maturity, since the premium will be lost over a longer "life" than if the bond is called early. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

If a callable bond is purchased at a premium, and is then called at par which of the following is TRUE? A The yield to call is higher than the nominal yield B The yield to call is lower than the nominal yield C The yield to call is the same as the nominal yield D The yield to call moves inversely to the nominal yield

The best answer is B. The yield to call will be lower than the yield to maturity if the bond was purchased at a premium (which will be lost faster if the bond is called early). Since the bond is purchased at a premium, both yield to call and yield to maturity must be lower than the nominal yield.

A rising rate of inflation would lead to: A higher bond yields and higher bond prices B higher bond yields and lower bond prices C lower bond yields and higher bond prices D lower bond yields and lower bond prices

The best answer is B. A rising rate of inflation will lead to higher interest rates. If interest rates rise, then bond prices will drop.

The amount by which the par value of a municipal bond exceeds the purchase price of the bond is termed the: A spread B discount C premium D takedown

The best answer is B. If par value is higher than the purchase price, then the bond is selling for less than par. This is the bond's discount.

The yield to maturity for a premium bond is: A stated interest rate - annual capital loss / bond par value B stated interest rate + annual capital gain / bond par value C stated interest rate - annual capital loss / bond average value D stated interest rate + annual capital gain / bond average value

The best answer is C. The formula for yield to maturity for a premium bond is: State Interest Rate - Annual capital loss/ Bond cost+ Redemption price/ 2 = Yield to Maturity

For bonds trading at a premium, rank the yield measures from lowest to highest? A Nominal, Basis, Current B Nominal, Current, Basis C Basis, Current, Nominal D Current, Basis, Nominal

The best answer is C. When bonds are trading at a premium, the yield to maturity will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

A bond is rated BBB by Standard and Poor's. The bond is: A Highest Quality Investment Grade B High Quality Investment Grade C Lowest Quality Investment Grade D Highest Level Speculative Grade

The best answer is C. A BBB rating is the lowest investment grade rating for a bond. The investment grade ratings are AAA, AA, A, and BBB.

The rating level at which a bond is first considered to be speculative is: A) A B) Aa C) Ba D) Baa

The best answer is C. A bond's rating becomes speculative when it falls below a BBB or Baa rating.

At which Standard and Poor's rating is a bond first considered to be speculative ("junk bond")? A) AA B) BBB C) BB D) C

The best answer is C. The top 4 ratings are "investment grade" - AAA, AA, A, and BBB. Bonds below these ratings are speculative. The best speculative rating is, therefore, BB.

An accelerating rate of inflation would lead to: A. higher bond prices and higher bond yields B. higher bond prices and lower bond yields C. lower bond prices and higher bond yields D. lower bond prices and lower bond yields

The best answer is C. An accelerating rate of inflation will lead to higher interest rates. If interest rates rise, then bond prices will fall.

When a bond trades at a premium, which bond yield will be the lowest? A Nominal B Stated C Current D Basis

The best answer is D. Basis (or yield to maturity) is the lowest because it not only considers that the current market price is at a premium to par; it also pro-rates the loss of the premium over the life of the bond, reducing the annual yield below the current yield.

When the price of a bond increases, which statement regarding yields is TRUE? A Current yield increases and yield to maturity increases B Current yield increases and yield to maturity decreases C Current yield decreases and yield to maturity increases D Current yield decreases and yield to maturity decreases

The best answer is D. When the price of a bond increases, yield to maturity, yield to call, and current yield all decrease. The only yield that never changes is the nominal yield or stated interest rate.

What is the benefit of a zero coupon bond? A Dividend income B Semi-annual payments C Amortization D Capital appreciation

The bond is purchased at a deep discount price and builds internally until maturity, at which point the bond is redeemed at par. They are often called capital appreciation bonds because of this and they are used to accumulate capital that will be used at maturity.

Purchasing Power Risk

is the risk that inflation will lower the value of bond interest payments and principal repayments. If inflation increases, then interest rates will rise, forcing bond prices down.

Term corporate bonds are quoted on a:

percentage of par basis in 1/8ths, which is the same as a "dollar" quote.