Unit 13: Types and Characteristics of Fixed Income (Debt) Securities and Methods Used to Determine Their Value

High-yield bonds

Another name for junk bonds, or lower grade bonds

Bond prices rise

As interest rates fall,

Bond prices fall

As interest rates rise,

above

Convertible securities generally sell at a price somewhat _______ the parity price

above $1,200.

DERP Corporation has issued 5% convertible debentures maturing in 2040. The conversion price is $40 and the common is currently trading at $48 per share. One would expect the DERP debentures to be selling somewhat

1/32 of $10, or $.3125

For government bonds, each .01 represents

$1000

Par or Face Value of a bond is always

7 years

A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio?

longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon

A bond's duration is

4.5% because the TIPS get the PRINCIPAL adjusted, not the coupon rate.

A client has a TIPS with a coupon rate of 4.5%. The inflation rate has been 7% for the last year. What is the inflation-adjusted return?

TIPS

A customer wishes to buy a security providing periodic interest payments, safety of principal, and protection from purchasing power risk. What should the customer purchase?

Duration

A measurement of the time it takes for the cash flow (interest payments) to repay the invested principal

the present value of future cash flows to determine an appropriate current value.

A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate

1/8 of $10, or $1.25

For corporate and municipal bonds, the fractions represent

less

For coupon bonds, duration is always ____ than the bond's maturity

equal

For zero coupon bonds, duration is always ___ to the bond's maturity

below par

If a customer buys a 6% bond maturing in 8 years on a 7.33 basis, the price of the bond is

federal tax, but exempt from state and local income taxes

Interest payments from TIPS and increases in the principal of TIPS are subject to

Bonds and debentures

Long term borrowing is usually in the form of

A minimum of five years, although more frequently the length of time is 20-30 years

Long-term debt financing is money borrowed for

Cash equivalents, such as commercial paper and T-bills

Short-term financing is usually in the form of

$36 per share

The XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock?

Lower

The coupon rate will invariably be ___ than for non-convertibles of the same quality

Indenture

The terms of the loan are expressed in a document known as the bond's

Bonds rated in the top 4 categories

What bonds are investment-grade bonds?

Pays $30 every 6 months.

What does 6% semiannually bond mean?

it's current yield increases

What happens to a bond's current yield when it trades at a discount?

decrease, increases

What happens to bond durations when coupon rates increase and maturities increase? As coupon rates increase, duration: As maturities increase, duration:

It's shorter

What happens to the duration of a bond with a higher coupon rate?

Yield to maturity

Which of the following factors has an inverse relationship to a bond's duration?

$100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return?