Chapter 6

3 major bond rating agencies:

1. Moody's 2. Standard and Poor's (S&P) 3. Fitch

Characteristics of treasury notes and bonds:

1. default risk free 2. low returns 3. interest rate risk 4. liquidity risk

corporate bond secondary markets include:

1. exchange market 2. over-the-counter market

the major issuers of debt market securities are:

1. federal 2. state 3. local gov 4. corporations

no matter the agency you choose for bond ratings, there are 2 draft categories:

1. good ones- investment rates 2. not so good- speculant rates (usually higher, larger default risk)

additional complexities in international bond investing:

1. higher risk; political risks higher 2. lower recourse in the event on non-repayment 3. foreign exchange rate movements can significantly impact returns

major purchasers of capital market securities are:

1. households 2. businesses 3. government units 4. foreign investors

motivations for international bond investing:

1. potentially higher returns 2. better diversification

functions of municipal bonds:

1. to fund imbalances between expenditures and receipts 2. to finance long term capital outlays

types of instruments sold on the bond markets:

1. treasury notes (t-notes) and bonds (t-bonds) 2. municipal bonds (munis) 3. corporate bonds

T-note or t-bond coupon rate is rounded down from stop yield to the nearest _____ if needed

1/8th

t-bonds have original maturities of ______

> 10 years

yield/required rate of return of debentures, mortgage bonds, and subordinated debentures:

SD-high Deb- medium mort- low

_____ must be paid by the buyer of a bond to the seller of a bond if the bond is purchased between interest payments

accrued interest

Treasury notes and bonds also trade in very ______

active secondary markets

compare municipal bond returns with fully taxable corporate bonds by finding the ______ for corporate bonds

after tax return

______ are bonds with coupons attached to the bonds

bearer bonds

in the US, borrower may no longer issue ______

bearer bonds

Primary markets: _____ is a public offering in which the investment bank does not guarantee a firm price and acts more as a distribution agent for a fee

best efforts offering

a _____ is the legal contract that specifies the rights and obligations of the issuer and the holders

bond indenture

changes in values of _____ can be used by bond traders to evaluate changes in the investment attractiveness of bonds of different types and maturities

bond indexes

______ reflect both the monthly capital gain and loss on bonds plus any interest income earned

bond market indexes

_____ are markets in which bonds are issued and traded

bond markets

_____ are long term debt obligations issued by corporations and government units

bonds

______ are the major suppliers of funds for municipal bonds and corporate bonds

businesses and financial firms

____ are markets for equity and debt instruments with original issue maturities of more than one year

capital markets

the full or dirty price of a t-note or t-bond is the sum of the _____ & _____

clean price + accrued interest

the US treasury sells t-notes and t-bonds through ________ auctions

competitive and noncompetitive single-bid

_____ are long term obligations issued by corporations

corporate bonds

____ are bonds backed solely by the general credit worthiness of the issuing firm, unsecured by specific assets/collateral, junior in their rights to secured debt

debentures

treasury notes and bonds are _____ because they are backed by the full faith and credit of the US government

default risk free

most secondary trading of t-notes and t-bonds occurs ____ through ______

directly; brokers and dealers

municipal bonds are attractive to household investors because interest is:

exempt from federal and most local income taxes

the annual ____ is equal to annual expenditures (G) less taxes (T) received

federal deficit

Primary markets: ____ is a public offering of municipal bonds made through an investment bank, where the investment bank guarantees a price for the newly issued bonds by buying the entire issue and then reselling it to the public at a higher price

firm commitment underwriting

______ are the major suppliers of funds for t-notes and t-bonds

foreign investors and governments

the price of the bond with accrued interest is called the _______ or the _____, the price without accounting for accrued interest is the ______

full price or dirty price; clean price

_______ are backed by the full faith and credit of the issuing municipality

general obligation (GO) bonds

_____ is the public debt and debt owed to the government borrowed by other departments in the government

gross federal debt

callable bonds have _____ return/yield

higher

competitve bidders submit bid yields and the ____ bid is accepted is called the ______

highest; stop out yield

many general obligation bonds are insured by a third party to _______

improve the credit rating and liquidity

the holder of a bearer bond presents the coupons to the issuer for ____ when they come due

interest payments

Because of their long maturity, t-notes and t-bonds experience wider price fluctuations than money market securities when __________

interest rates change

corporate bonds may be either ______ or _______ grade

investment or speculative

secured debt issues are _____ and require ____ yields relative to unsecured bonds

less risky, lower

T-bonds and t-notes experience _____ because the older ones are traded less frequently than newly issued t-bonds and t-notes

liquidity risk

treasury notes and bonds have ____ to reflect low default risk

low interest rates

for t-notes and t-bonds, a high price paid mean there is a _____

low yield

bond market indexes are managed by _______

major investment banks

treasury notes and bonds are issued in _____ denominations of ______

minimum; multiples of $100

2-year notes are auctioned ______

monthly

______ issued to finance specific projects, which are pledged as collateral for the bond issue

mortgage bonds

_____ are securities issued by state and local governements

municipal bonds

corporate bonds primary markets are identical to that of ______

munis

the _____ is the sum of historical annual federal deficits

national debt (ND)

t notes have original maturities from _____

over 1 to 10 years

corporate bonds are rated by ______

perceived default risk

treasury notes and bonds prices are quoted as _______

percentages of face value

_____ bonds are sold to one or a few qualified institutional investors

private placement

Bidders at the stop out yield may receive a ______ of their allotment

prorata share

3-, 5-, and 10-year notes are auctioned _______

quarterly (feb, may, aug, nov)

_____ are bonds in which payments are made automatically to the owner of record

registered bonds

_____ are sold to finance specific revenue generating projects

revenue bonds

the majority of municipal bonds are ______

revenue bonds

______ municipal bonds trade infrequently due mainly to a lack of information on bond issuers

secondary markets

mortgage bonds are ____

secured debt issues

30-year bonds are auction ______

semi-annually (feb and aug)

_____ mature sequentially, meaning the issue contains many maturity dates, with a portion of the issue being paid off on each date

serial bonds

a ____ is a requirement that the issuer retire a certain amount of the bond issue early as the bonds approach maturity

sinking fund provision

Investment rates have to be cautious as to not fall into the _____ and send bad signals to the market

speculant rates

_____ give bond holders the opportunity to purchase common stock at a pre-specified price

stock warrants

______ are also secured bonds, junior in their rights to mortgage bonds and debentures

subordinated debentures

riskiness level of debentures, mortgage bonds, and subordinated debentures:

subordinated debentures -> debentures -> mortgage bonds

the primary market of t-notes and t-bonds is similar to that of ______

t-bills

______ mature all at once

term bonds

all noncompetitive bidders and competitive bidders who bid less than the stop out receive _____

their full allotment

_____ are issued by the US treasury to finance the national debt and other government expenditures

treasury notes and bonds (t-note and t-bond)

Because of their long maturity, t-notes and t-bonds experience _______ than money market securities when interest rates change

wider price fluctuations