Unit 2: Individual Securities- Debt
Your customer calls you with a question. They tell you that they received a phone call from the bond desk telling them that they bought 20 bonds at 100. They want to know how much they paid for the bonds before any commission or other charges. You tell them...
$20,000
An investor has purchased a bond with a 5% coupon. This investor will receive...
$50 annual interest until maturity
3 Major Credit Rating Agencies
- Moodys Investors Service , Inc. - Standard & Poors Rating Service (S&P) - Fitch Ratings, Inc.
Types of Bond Maturity:
- Term - Serial - Balloon
Which of these reasons would allow for a municipality to issue revenue bonds easier instead of general obligation bonds? 1. Revenue bonds do not require voter approval. 2. Revenue bonds generally have a higher rating than GO bonds from the same issuer. 3. Revenue bonds are not constrained by a statutory debt limit. 4. Revenue bonds are supported by ad valorem taxes.
1 & 3
Five years ago your client purchased at par $100,000 of New Brunswick City GO bonds maturing in 20 years from now and callable in six months. Interest rates have gone down over the last five years. Which of these should your client do? 1. Your client should recognize that the bonds have a high probability to be called. 2. Your client should recognize that the bonds are unlikely to be called. 3. Your client should expect the bond is trading at a large discount. 4. Your client should expect the bonds are trading at a small premium.
1 & 4
Your customer, Eleanor, purchased an InDebt Inc., 5% debenture at a price of 94. It matures in 12 years. What is the yield to maturity?
5.73
The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105½ is approximately...
7.1%
A bond that is structured so that the issuer pays off a portion of the principal before the final maturity buy pays off a major portion of the bond at the final maturity date is...
A ballon bond
STRIPS are delivered in...
A book entry
An investor who is seeking income might choose a corporate bond because...
A corporate bond pays a steady income and are generally reliable
A 6% corporate bond trading on a 7% basis is trading
A discount
A company has issued bonds (debt securities) to investors. For these investors, these securities represent..
A loan to the issuing company
Banker's Acceptance (BA)
A money market instrument used to finance international trade. It is a time draft drawn on a bank by an importer or exporter of goods, and it represents the bank's conditional promise to pay the face amount of the note at maturity (normally less than three months).
In the event that a liquidation needs to occur, subordinated debtholders...
Agree to be paid last of all debtholders
Call Feature
Allows an issuer to call in a bond before maturity
Current Yield Formula
Annual Coupon Payment / Current Market Value = Current Yield
Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond?
BABs
List Treasury securities in their correct order of shortest to longest maturities
Bills, notes, bonds
Which of these risks are not normally associated with bonds?
Business Risk
A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as...
Collateral trust bonds
If a bond is trading at a premium, what are the rates ranked from high to low?
Coupon rate, current yield, yield to maturity, yield to call
A customer says they have a diversified portfolio of notes and bonds. This means their portfolio consists primarily of
Debt instruments
A bond's rating is used primarily as a measure of its
Default risk
Default (Credit) Risk
Degree of possibility that the issuer of a debt security will default in the payment of either principal or interest
An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be?
Equal to the Yield to Maturity (YTM)
T/F: Securities issued by the Government National Mortgage Association (GNMA) generate tax-free interest.
False
T/F: Treasury Receipts are backed by the full faith and credit of the U.S. government
False
The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years and the interest and principal payments will be funded from real estate taxes. This is an example of a...
General Obligation (GO) Bond
Which of the following bonds trade flat (without interest) unless interest payments are declared by the board of directors (BOD)?
Income Bonds
Convertible Feature
Issued by corporate issuers, allowing the investor to convert the bond into shares of common stock
Balloon Bond
Issuer sometimes schedules its bonds maturity using elements of both term and serial maturities. Issuer repays part of the bond's principal before the final maturity date, but pays off the major portion of the bond at maturity.
What term might not be used to describe a B rating bond?
Lower grade
Yield to Call (YTC)
May be redeemed before maturity at the issuers option
Current Yield (CY)
Measures a bonds annual coupon payment (interest) relative to its market price
A customer has a short-term investment time horizon and a fairly certain need for funds she wishes to invest. Which of the following might meet those two investment objectives?
Money market instruments
Lando Entertainment, Inc., issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called a...
Morgage bond
The stated coupon on a bond is its
Nominal Yield
The stated coupon on a bond is its...
Nominal yield
An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy...
Noncallable bonds
A serial bond is best described as...
Portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid
Subordinate debentures are senior to which of the following fixed income securities?
Preferred Stock
To the benefit of the bondholder, a puttable bond is likely to be put back to the issuer when interest rates _____?
Rise
A customer buys a 4% Treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity (YTM) is...
Same as current yield
What is the correct order of priority for a corporate liquidation?
Secured bond, debenture, subordinated debenture, common stock
A corporate bankruptcy liquidation took place. Of the following—general creditors, secured bondholders, subordinated debenture holders, accrued taxes—who was paid first and who was paid last?
Secured bondholders first, subordinated bondholders last
An investor holding T-Bonds will receive interest payments...
Semiannually
Treasury bonds pay interest...
Semiannually and mature at par value
What is not a debt-security-maturity schedule?
Series
Term Bond
Structured so that the principal of the whole issue matures at once
Your customer is a resident of the state of Utah. She owns bonds issued by Puerto Rico. The interest from these bonds is...
Tax free at all levels for U.S citizens
Yield to Maturity (YTM)
The annualized return of the bond if held to maturity
Maturity
The date the investor receives the loan principle back
Your customer, Shea, has a large portfolio of bonds and dividend paying stocks. Her primary interest is generating current income. She is trying to understand how taxes work for her T-bonds. You explain that...
The interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level
Put Feature
The investor can put the bond back to the issuer before it matures
What debt instrument pays no periodic interest?
Treasury STRIPS
T/F: A 30-year T-bond issued by the Treasury 29 years ago is a money market security
True
T/F: Income Bonds don't pay income unless declared by the Board of Directors
True
T/F: T-bonds & T-notes are both priced as a percentage of par
True
T/F: T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity.
True
T/F: Treasury STRIPS, receipts, bills , notes, and bonds are all sold at a discount to par.
True
T/F: Treasury bills are the only type of Treasury security issued without a stated interest rate.
True
T/F: Treasury receipts are not backed by the full faith and credit of the U.S. government
True
T-bills are issued (auctioned) by the U.S. Treasury Department how often?
Weekly
A CMO consists of...
an FNMA, FHLMC, and other mortgage backed securities
A zero-coupon bond interest pays
at maturity and is taxed annually
Serial Bond
schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid
