Ch 10 (Fixed Income Securities)
Issued by only corporations, ___________s are different from most other types of corporate debt, because even though these securities may start out as bonds, they usually end up as shares of commons stock.
Convertible Bond
If a U.S. Treasury bond has a quote of 141:08, then it is selling at $__________.
1412.50
To provide the corporation with the flexibility to retire the debt and force conversion, most ___________s come out as freely callable issues, or they carry very short call deferment periods.
Convertible Bond
The _____________indicates the price at which the common stock would have to sell in order to make the convertible security worth its present market price.
Conversion Equivalent
An investor can recover a _______________ either through the added current income the convertible provides, or by selling the issue at a premium equal to or greater than that which existed at the time of purchase.
Conversion Premium
Investors are willing to pay a(n)______________primarily because of the added current income a convertible provides relative to the underlying common stock.
Conversion Premium
The extent to which the market price of the convertible exceeds its conversion value is known as the ___________.
Conversion Premium
____________s tend to fade away as the price of the convertible goes up.
Conversion Premium
From the investor's point of view, the most important piece of information is the _____________ or the Conversion Ratio
Conversion Price
The __________ indicates the stated value per share at which the common stock will be delivered to the investor in exchange for the bond.
Conversion Price
The key element of any convertible bond is the ____________, which stipulates the conditions and specific nature of the conversion feature.
Conversion Privilege
The__________ denotes the number of common shares into which the bond can be converted.
Conversion Ratio
Convertible issues seldom trade precisely at their conversion values. Rather, they usually trade at prices that exceed the bond's underlying ______________.
Conversion Value
____________ indicates what a convertible issue would trade for if it were priced to sell on the basis of its stock value.
Conversion Value
Convertible Bonds are used by all types of companies and are issued either as ________________s (by far the most common type) or as convertible preferreds.
Convertible Bond
When new ____________s come to the market, their coupons are normally just a fraction of those on comparable regular bonds.
Convertible Bond
______________ investors receive only the INTEREST from their investments and their capital remains fully invested.
Mutual Fund
A bond can be ______________, which means the issuer is prohibited from retiring the bond prior to maturity
Noncallable
Agency issues are normally _____________or carry lengthy call deferment features.
Noncallable
Treasury Securities today are __________________ Securities.
Noncallable
A debt security that's originally issued with a maturity of 2 to 10 years is known as a _________.
Note
Convertible bonds that are issued as _______s are just like convertible bonds except that the debt portion of the security carries a shorter maturity--usually 5-10 years.
Note
In practice, ____________s are often issued with maturities of 5 to 7 years.
Note
The issuer of a _____________ is obligated to pay principal and interest ONLY IF a sufficient level of revenue is generated.
Revenue Bond
The vast majority of Municipal Bonds (Munis) today come out as _______________s, accounting for about 70% to 75% of the new issue volume.
Revenue Bond
Which type of Municipal Bonds are serviced by the income generated from specific income producing projects (e.g., toll roads)?
Revenue Bond
The bond market is far more stable than the ___________.
Stock Market
Assume that a certain convertible security recently came to the market, and it carried the provision that each $1,000 note could be converted into shares of the issuing company's stock at $62.55 a share. If the company's stock is trading in the market at $125 a share at the time of conversion, then you would have just converted a $1,000 debt obligation into $______________ worth of stock.
1,997.50
A convertible that carries a conversion ratio of 20 would have a conversion value of $_________ if the firm's stock traded at a current market price of $60 per share.
1,200
If a convertible were trading at $_________ and had a conversion ratio of 20, the conversion equivalent of the common stock would be $70 per share.
1,400
You buy a Treasury Inflation Protected Bond with a par value of $1,000 at the beginning of the year, and by the end of the year inflation increased by 2.5%, the value of that bond would be $______________.
1,025
If an investor pays $10 for a $7 convertible, then they will only choose to convert their bonds into shares if the market price of the shares increase to a price more than $______.
10
IF a municipal bond offerd a yiled of 6.5%, then an individual in the 35% tax bracket would have to find a fully taxable bond with a yield of __________% to reap the same after tax returns as the municipal bond.
10.00
If a corporate or municipal bond has a quote of 121.683, then the bond is selling at $____________
1216.83
If the yield spread is 10.5% and an investor requires a 5% interest rate on government bonds, then they will demand a ____________% rate on the most risky corporate bonds.
15.5
A convertible that carries a conversion ratio of _____would have a conversion value of $1,200 if the firm's stock traded at a current market price of $60 per share
20
A new issue may come out as a 25 year bond; five years later, it will have _____________years remaining to maturity.
20
If a $1,000 convertible bond stipulates a conversion price of $50, the Conversion ratio would then be ____________.
20
A 20 year Term Bond issued in 2010 has a single maturity date of ____________.
2030
If a $1,000 convertible bond stipulates a conversion ratio of 20, the Conversion price would then be $_____________.
50
A convertible that carries a conversion ratio of 20 would have a conversion value of $1,200 if the firm's stock traded at a current market price of $_______ per share
60
If a convertible were trading at $1,400 and had a conversion ratio of 20, the conversion equivalent of the common stock would be $______ per share.
70
You buy a Treasury Inflation Protected Bond with a par value of $1,000 at the beginning of the year, and by the end of the year inflation increased by 2.5%, the value of that bond's coupon payment would be $______________ if that bond paid an 8% coupon rate.
82.00
If a bond has a par of $1,000 and it has a "quote" of 85, then it is selling for $_____
850
If a corporate or municipal bond has a quote of 87.562, then the bond is selling at $____________
875.62
If a bond has a par value of $1,000, an 8% coupon rate, and a market value of $875, the it's Current Yield would be _________%
9.14
If a U.S. Treasury bond has a quote of 94:16, then it is selling at $__________.
945.00
As a rule, the generic term _________is used to denote both government sponsored and federal agency obligations.
Agency
Most of the government _____________s support agriculture or housing.
Agency
In contrast to stocks, ____________s are liabilities--publicly traded IOUs where the [answer]holders are actually lending money to the issuer.
Bond
A high grade investment bonds, high quality by all standards but rated lower primarily because the margins of protection are not quite as strong is called _________________.
Aa/AA
The highest bond rating assigned, denoting extremely strong capacity to pay principal and interest is called _________________, or "gilt-edge" securities
Aaa/AAA
Although _____________s are the closest thing to Treasuries, they are not obligations of the U.S. Treasury and technically should not be considered the same as Treasury Bonds
Agency Bond
Bonds, which aren't Treasury Bonds, that are considered to be very high quality securities that have almost no risk of default are called ___________________s.
Agency Bond
In spite of the similar default risk to Treasury bonds, _____________s usually provide yields that are slightly above the Market Rates for Treasuries. Thus, they offer a way to increase returns with little or no real difference in risk.
Agency Bond
______________s are debt securities issued by various agencies and organizations of the U.S. government, such as the Federal Home Loan Bank, the Federal Farm Credit Systems, the Small BUsiness Administration, the Student Loan Marketing Association, and the Federal National Mortgage Association.
Agency Bond
In practice, ____________s normally carry maturities of 20 to 30 years, or more.
Bond
Technically, ________s are negotiable, publicly traded, long-term debt securities.
Bond
____________prices do not typically rise in step with a firm's profits as stocks do. However, they do rise and fall as market interest rates change.
Bond
___________s can be either junior or senior.
Bond
The _______________is nearly 3 times the size of the U.S. Stock Market
Bond Market
The market responds to rating revisions by adjusting _____________s accordingly
Bond Yield
When inflation takes off unexpectedly, as it did in the late 1970s, _____________s start to lag behind inflation rates, and the interest payments made by bonds fail to keep up.
Bond Yield
Relatively high yields, short maturities (3-5 years), high credit quality, and monthly, rather than semiannual, principal/interest payments that accompany many of these securities are the major reasons investors are attracted to _______________s
Asset Backed Securities (ABS)
______________s, first introduced in the mid 1980s, are created when an investment bank bundles together some type of debt linked asset (such as loans or receivables), and then sells investors--[answer]--the right to receive all or part of the future payments made on that debt.
Asset Backed Securities (ABS)
Pass through securities, known as _____________s, are backed by pools of auto loans, credit card bills, and home equity lines (3 of the principal types of collateral), as well as computer leases, hospital receivables, small business loans, truck rentals, and even royalty fees.
Asset Backed Security (ABS)
A ____________technically has an initial term to maturity of more than 10 years.
Bond
Compared to stocks, ____________s are generally less risky and provide higher current income.
Bond
The Municipal Bond Investors Assurance Corporation (MBIA) and the American Municipal Bond Assurance COrporation (AMBAC) will normally insure any general obligation or revenue bond as long as it carries an S&P rating of ____________or better.
BBB
The biggest differences in returns between stocks and bonds usually come during _____________s when stock returns are negative.
Bear Market
Generally speaking, ____________s are exposed to 5 major types of risks: 1. Interest Rate Risk 2. Purchasing Power Risk 3. Business/Financial Risk 4. Liquidity Risk 5. Call Risk
Bond
Generally, ______________s are associated with more profitable companies that rely less on debt as a form of financing, are more liquired, have stronger cash flows, and have no trouble servicing their debt in a prompt and timely fashion.
Bond/Agency Rating
____________s indicate the amount of Credit Risk embedded in a bond and are widely used by fixed income investors.
Bond/Agency Rating
Since 1986 all ew agency (and Treasury) securities have been issued in _____________ form. This means that no certificate of ownership is issued to the buyer of the bonds. Rather, the buyer receives a "confirmation" of the transaction, and their name is entered in a computerized logbook, where it remains as long as that investor owns the security.
Book Entry
The stronger the financial position of the issuer, the less _________________there is to worry about.
Business/Financial Risk
______________ is basically the risk that the issuer will default on interest and or principal payments.
Business/Financial Risk
Issuers often ____________ (prepay) their bonds when interest rates fall.
Call
A(n)____________ stipulates whether and under what conditions a bond can be called in for retirement prior to maturity.
Call Feature
Every bond is issued with a ______________.
Call Feature
The following are 3 types of _______________s: Freely Callable, Noncallable, Deferred Call.
Call Feature
__________s allow bond issuers to take advantage of declines in market interest rates.
Call Feature
As a general rule, ___________s usually equal about 8 to 12 months' interest at the earliest date of call and then become progressively smaller as the issue nears maturity.
Call Premium
Investors who find their bonds called out from under them do receive a small amount of extra compensation called the ________________. If the issue is called, the issuer will pay this to investors, ALONG WITH the issue's par value
Call Premium
The sum of the par value plus call premium represents the issue's ______________.
Call Price
___________, or prepayment risk, is the risk that a bond will be "called" (retired) long before its scheduled maturity date.
Call Risk
Normally, as pooled mortgages are prepaid, all bondholders receive a prorated share of the prepayments. The net effect is to sharply reduce the life of the bond. A(n)________________, in contrast, divides investors into classes (called tranches), depending on whether they want a short, intermediate, or long term investment. Although interest is paid to all bondholders, all principal payments go first to the shortest tranche until it is fully retired.
Collateralize Mortgage Obligation (CMO)
Some types of ________________s can be as simple and safe as Treasury Bonds. Others can be fare more volatile--and risky-- than the standard Mortgage Backed Securities they're made from.
Collateralize Mortgage Obligation (CMO)
_____________s on municipal bonds are NOT EXEMPT from taxes.
Capital Gain
Imagine that you buy a brand new bond issued by a company like GE paying 6% interest. Suppose that a month later, market rates have risen, and new bonds pay investors 7% interest. If you want to sell your GE bond, you're likely to experience a ______________because investors will not want to buy a bond paying 6% interest when the going rate in the market is 7%.
Capital Loss
A single issuer may have a number of different bonds outstanding at any given point in time. In addition to coupon and maturity, on bond can be differentiated from another by the type of ___________behind the issue.
Collateral
_______________s are backed by financial assets owned by the issuer but held in trust by a third party.
Collateral Trust Bond
Basically, _____________s are DERIVATIVE SECURITIES created from traditional mortgage backed bonds, which are placed in a trust.
Collateralize Mortgage Obligation (CMO)
Highly volatile _______________s are a result of Wall Street performing the financial equivalent of gene splicing: Investment bankers isolate the interest and principal payments from the underlying Mortgage Backed Securities and rechannel them into the different tranches.
Collateralize Mortgage Obligation (CMO)
It was in part an effort to diffuse some of the prepayment uncertainty in standard mortgage backed securities that led to the creation of ________________s.
Collateralize Mortgage Obligation (CMO)
The overall risk in a(n)______________cannot exceed that of the underlying mortgage backed bonds, so in order for there to be some tranches with very little (or no) prepayment risk, others have to endure a lot more.
Collateralize Mortgage Obligation (CMO)
If a _____________ has not been converted by the end of its conversion period, it reverts to a straight debt issue with no conversion privileges. This is done to give the issuing firm more control over its capital structure.
Conversion Bond
Sometimes analysts use an alternative measure that computes the _____________, also known as Conversion Parity
Conversion Equivalent
_____________s enable firms to raise equity capital at fairly attractive prices. That is, when a company issues stock in the normal way (by selling more shares in the company), it does so by setting a price on the stock that's slightly BELOW prevailing market prices. In contrast, when it issues the stock indirectly through a(n) [answer], the firm can set a price that's ABOVE the prevailing market.
Convertible Bond
___________s are usually issued as subordinated debentures and carry the provision that within a stipulated time period, the bond may be converted into a certain number of the issuing company's common stock.
Convertible Bond
Many ______________s, especially the longer ones, carry call deferment provisions that prohibit prepayment for the first 5 to 10 years.
Corporate Bond
Rates on ______________s tend to mirror rates on government bonds, although [answer] rates are higher due to the risk of default by the issuer.
Corporate Bond
The market for _________________s is customarily subdivided into 4 segments: 1. Industrials (most diverse of the groups) 2. Public utilities (the dominant group in terms of volume of new issues) 3. Rail and Transport Bonds 4. Financial issues (e.g., banks, finance companies)
Corporate Bond
_____________s are popular with individuals because of their relatively attractive yields.
Corporate Bond
___________s usually come in $1,000 denominations and are issued on a Term Basis with a single maturity date. Maturities usually range from 25 to 40 years.
Corporate Bond
___________s are the major nongovernmental issuers of bonds
Corporation
A bond's _____________defines the annual interest income that the issuer will pay to the bondholder.
Coupon
When a bond sells for a discount it is the result of market rates being greater than the issue's ______________.
Coupon Rate
When a bond sells for a premium results when market interest rates drop below the bond's ______________.
Coupon Rate
______________s represent the biggest segment of the Asset Backed Securities market.
Credit Card Receivable
A bond's ____________measures the interest component of a bond's return.
Current Yield
If you expect a(n) ______________in interest rates, you should buy bond with lower coupons and longer maturities (to maximize capital gains).
Decline
The Conversion Ratio of a ___________generally deals with large multiples of common stock, such as 15, 20, or 30 shares.
Debenture
There are several classes of unsecured bonds, the most popular of which is known as a(n)_____________
Debenture
Before you invest in _______________, you'll want to consider credit quality, interest rates, maturity, and other factors.
Debt Securities
A bond could carry a ____________, which means the issue cannot be called until after a certain length of time has passed from the date of issue. In essence, the issue is noncallable during the deferment period and then becomes freely callable thereafter.
Deferred Call
Because they are eventually converted into shares of the issuing company's common stock, convertibles are usually viewed as a form of _____________.
Deferred Equity
A bond has a coupon rate of 8% and the market rate is 10%. Is the bond a Discount Bond or a Premium Bond?
Discount Bond
A phenomenon in which investors pull their funds out of the stock market to invest in less risky securities such as bonds is called "_________"
Flight to Quality
The ______________ is normally separated into 4 major segments, according to type of issuer: 1. Treasury 2. Agency 3. Municipal 4. Corporate
Domestic Bond Market
The conversion ratio is normally adjusted for stock splits and significant stock dividends. As a result, if a firm declares a 2 for 1 stock split, the conversion ratio of any of its outstanding convertible issues also __________s
Double
Companies and governmental bodies that want to raise money by issuing bonds save money if they have an _______________rating because investors will accept lower coupon rates on these bonds compared to those with lower ratings.
Investment Grade
A high Yield Spread can indicate a bad ____________.
Economy
The proceeds from _______________s are used to purchase equipment (e.g., jumbo jets and railroad engines) that serves as the collateral for the issue.
Equipment Trust Certificate
______________s are usually issued in serial form and carry uniform annual installments throughout. They normally carry maturities that range from 1 year to a maximum of 15 to 17 years. Despite a near perfect payment record that dates back to pre-Depression days, theses issues generally offer above average yields to investors.
Equipment Trust Certificate
________________s are secured by specific pieces of equipment (e.g., boxcars and airplanes) and are popular with railroad and airlines.
Equipment Trust Certificates
Convertible Bonds should be viewed PRIMARILY as a form of ____________.
Equity
Because of the _____________, the market price of a convertible has a tendency to behave very much like the price of its underlying common stock.
Equity Kicker
Convertible securities are popular with investors because of their ______________--i.e., the right to convert these bonds into shares of the company's commons stock.
Equity Kicker
The top 4 ratings (Aaa through Baa, or AAA through BBB) designate _________________s
Investment Grade Bond
A California Municipal Bond is free of California tax if the bondholders lives in California, and its interest income is NOT subject to state tax if the investor resided in Arizona.
F
If you hope to recover any conversion premium, the best and most common way to do it will probably have be by selling the issue at a premium equal to or greater than that which existed at the time of purchase.
F
Municipal Bonds are More attractive to investors with Lower taxes (An investor who makes a low annual salary).
F
The U.S. Treasury issues Zero Coupon Bonds.
F
An upward bond rating (e.g., from A to AA) causes the market yield on the bond to ______________.
Fall
Because bonds are nearly always called for prepayment after interest rates have _______en, comparable investments just aren't available. Thus investors have to replace high yielding bonds with much lower yielding bonds.
Fall
When Interest rates rise, bond prices_____________
Fall
When bond prices rise, that means Interest Rates are __________ing.
Fall
The name for Junk Bonds that one had investment ratings is _________________.
Fallen Angels
To overcome some of the problems in the marketing of many relatively small federal agency securities, Congress established the ___________________ to consolidate the financing activities of all federal agencies.
Federal Financing Bank
Note that _____________s are less secure than, and should not be confused with, straight first mortgage bonds.
First and Refunding Bond
_______________s are basically a combination of first mortgage and junior lien bonds (i.e., the bonds are secured in part by a first mortgage on some of the issuer's property and in part by second or third mortgages on other properties).
First and Refunding Bond
Bonds are often referred to as _______________ because the debt payment of the issuers are usually fixed.
Fixed Income Securities
The biggest differences in returns between stocks and bonds usually come during Bear Markets, when stock returns are negative. In part, this reflects a phenomenon called "___________" in which investors pull their funds out of the stock market to invest in less risky securities such as bonds.
Flight to Quality
While it's the bondholder who has the right to convert the bond at any time, more often than not, the issuing firm initiates conversion by calling the bonds--a practice known as ___________.
Forced Conversion
From the perspective of a U.S. investor, we can divide _____________s into two broad categories on the basis of the currency in which the bond is denominated: 1. U.S. pay (or dollar denominated) bonds 2. Foreign pay (or non dollar denominated) bonds.
Foreign Bond
The big risk with ________________s has to do with the impact that currency fluctuations can have on returns in U.S. dollars.
Foreign Bond
A bond can be ___________, which means the issuer can prematurely retire the bond at any time.
Freely Callable
An uninsured Revenue Bond with a guaranteed issueis very much like a(n)___________________ because the investor knows that principal and interest payments will be made on time.
General Obligation Bond
Which type of Municipal Bonds are backed by the full faith, credit, and taxing power of the issuer?
General Obligation Bond
________________s, unlike Revenue Bonds, are required to be serviced in a timely fashion irrespective of the level of tax income generated by the municipality.
General Obligation Bond
Lower market interest rates leads to ______________bond prices.
Higher
______________s represent the second largest segment of the Asset Backed Securities Market.
Home Equity Loan
Convertible bonds are ____________s because they contain attributes of both debt and equity.
Hybrid Security
Most corporate and municipal bonds are relatively _______________.
Illiquid
If you expect a(n)______________ in interest rates, you should buy bonds with higher coupons and shorter maturities.
Incline
With _____________s there is no legally binding requirement to meet interest payments on a timely or regular basis so long as a specified amount of income has not been earned.
Income Bond
________________s are similar in many respects to Revenue Bonds found in the Municipal Market
Income Bond
_______________s, the most JUNIOR of all bonds, are unsecured debts requiring that interest be paid only after a certain amount of income is earned.
Income Bond
_______________ erodes the purchasing power of money, and that creates purchasing power risk.
Inflation
Bonds such as __________________s appeal to investors who want some protection from the risk of rising Inflation.
Inflation Indexed Bond
Dispite the term "Fixed Income", some bonds make interest payments that vary through time. For example, Governments in the U.S. and many other countries issue ________________s with interest payments that rise with inflation.
Inflation Indexed Bond
When Inflation rates are low and predictable, bonds do pretty well, because their returns exceed the ________________ by an amount sufficient to provide investors with a positive return, even after accounting for inflation's effect on purchasing power.
Inflation Rate
When the _______________ falls unexpectedly, bonds do exceptionally well.
Inflation Rate
A basic relationship that bond investors must keep in mind is that _________________s and bond prices move in OPPOSITE directions.
Interest Rate
Higher ____________s make bond returns less predictable.
Interest Rate
The behavior of ______________s is the single most important influence on bond returns.
Interest Rate
_______________s drive the bond market
Interest Rate
______________s determine not only the current income investors will receive but also the capital gains (or losses) they will incur.
Interest Rate
For bonds, _______________translates into market risk, meaning that the behavior of interest rates affects nearly ALL bonds and cuts across ALL sectors of the market, even the U.S. Treasury Market.
Interest Rate Risk
There is more ______________with a long term bond than with a short term bond.
Interest Rate Risk
______________is the most important risk that Fixed Income investors must face, because it's the major cause of price volatility in the bond market.
Interest Rate Risk
The results of a 25 year study covering the period from 1980 to 2004 showed that ______________s typically delivered about 80% more of the returns obtained from long bonds, but at roughly half the risk.
Intermediate Term Bond
Although it may appear that the firm is receiving the rating, it is actually the ____________ that receives it.
Issue
Call features work for the benefit of the ___________s
Issuer
_____________s, are backed only by the promise of the issuer to pay interest and principal on a timely basis.
Junior Bond
Bonds with below Investment-Grade ratings (BB/Ba and lower) are called high-yield bonds, or _______________s.
Junk Bond
Companies that issue _____________s generally have excessive amounts of debt in their capital structures and their ability to service that debt is subject to considerable doubt.
Junk Bond
Unlike investment grade bonds, whose prices are closely linked to the behavior of market interest rates, ________s tend to behave more like stocks.
Junk Bond
______________s (or high yield bonds, as they're also called) are highly speculative securities that have received low, sub-investment-grade ratings (typically Ba or B). These bonds are issued primarily by corporations and also by municipalities.
Junk Bond
____________s often take the form of subordinated debentures, which means the debt is unsecured and has a low claim on assets.
Junk Bond
In contrast to stocks, Bonds are ____________s--publicly traded IOUs where the bondholders are actually lending money to the issuer.
Liability
Start with a Zero Coupon Bond, throw in a Conversion Feature and a Put Option, and you have a ____________.
Liquid Yield Option (LYON)
___________s are Zero Coupon Convertible Bonds that are convertible, at a fixed conversion ratio, for the life of the issue. Thus, they offer the built in increase in value over time that accompanies any Zero Coupon Bond (as it moves toward its par value at maturity), plus full participation in the equity side of the issue via the equity kicker.
Liquid Yield Option (LYON)
_______________is the risk that a bond will be difficult to sell at a reasonable price if the investor wants to sell it.
Liquidity Risk
Investors are aware of the fact that inflation erodes the purchasing power of money (purchasing power risk), so ______________s on bonds compensate investors for the rate of inflation that they expect over the life of a bond.
Market Interest Rate
When ____________s rise, bond prices fall, and vice versa.
Market Interest Rate
If investors want to reduce their exposure to capital losses or, more to the point, to lower the price volatility in their bond holdings, then they should buy bonds with shorter ______________s.
Maturity
The_____________of a bond has a greater impact on price volatility than the coupon rate does.
Maturity
Unlike common stock all debt securities have limited lives and will mature on some future date, the issue's ________________.
Maturity Date
Although ____________s come with normal coupons, the interest is payed MONTHLY rather than semiannually.
Mortgage Backed Bond
As an investor in _____________s, you hold an undivided interest in the pool of mortgages. When a homeowner makes a monthly mortgage payment, that payment is essentially passed through to you, the bondholder, to pay off the [answer] you hold.
Mortgage Backed Bond
One feature of _____________s is that they are self liquidating investments; that is, a portion of the monthly cash flow to the investor is repayment of principal. Thus, you are always receiving back part of the original investment capital, so that at maturity, there is NO big principal Payment.
Mortgage Backed Bond
Simply put, a(n)______________ is a debt issue that is secured by a pool of residential mortgages.
Mortgage Backed Bond
With __________s, an issuer, such as the Government National Mortgage Association (GNMA), puts together a pool of home mortgages and then issues securities in the amount of the total mortgage pool. These securities, also known as "pass through securities" or "participation certificates", are usually sold in minimum denominations of $25,000. Although their maturities can go out as far as 30 years, their average life is generally much shorter (perhaps as short as 8 to 10 years) because many of the mortgages are paid off early.
Mortgage Backed Bond
____________s are issued primarily by 3 federal agencies: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and the Federal National Mortgage Association (FNMA).
Mortgage Backed Bond
________________s are essentially debt instruments with returns that depended upon payments on an underlying pools of residential real estate mortgages.
Mortgage Backed Security
_______________s are brought to the market as either General Obligation or Revenue Bonds
Municipal
____________s are the issues of states, counties, cities, and other political subdivisions (such as school districts and water and sewer districts).
Municipal
About 40% of______________s are held by individuals.
Municipal Bond
Generally speaking, an investor has to be in one of the higher federal tax brackets (28% to 35%) before __________________s offer yields that are competitive with fully taxable issues.
Municipal Bond
________________s are often issued as Serial Obligations, which means the issue is broken into series of smaller bonds, each with its own maturity date and coupon.
Municipal Bond
______________s pay interest that is not subject to federal income taxation.
Municipal Bond
____________s are customarily issued in $5,000 denominations.
Municipal Bond
Municipal Bond Insurance, through the use of ______________,results in higher ratings (usually AAA) and improved liquidity for theses bonds, which are generally more actively traded in the secondary markets.
Municipal Bond Guarantees
With ______________, a party other than the issuer assures the bondholder that principal and interest payments will be made in a timely manner. The third party, in essence, provides an additional source of collateral in the form of insurance, placed on the bond at the date of issue, which is nonrevocable over the life of the obligation.
Municipal Bond Guarantees
The 2 principal insurers in municipal bond guarantees are the _______________ and the American Municipal Bond Assurance Corporation (AMBAC).
Municipal Bond Investors Assurance Corporation (MBIA)
The bond market is chiefly _____________in nature, as listed bonds represent only a small portion of total outstanding obligations.
Over the Counter
Probably the most unusual type of junk bond is something called a(n)____________.
PIK Bond
With _____________s (payment in kind) rather than paying the bond's coupon in cash, the issuer can make annual interest payments in the form of additional debt. This "financial printing press" usually goes on for 5-6 years, after which time the issuer is supposed to start making interest payments in real money.
PIK Bond
Regardless of the type, all bond prices are usually expressed as a percent of ___________.
Par
A bond's market price need not, and usually does not, equal its ____________
Par Value
One way to asses conversion premium is to compute the issue's _____________, a measure of the length of time it will take to recover the conversion premium from the EXTRA interest income earned on the convertible.
Payback Period
The Conversion Ratio of a ______________ is generally very small, often less than one share of common and seldom more than 3 or 4 shares.
Preferred
A bond has a coupon rate of 10% and the market rate is 8%. Is the bond a Discount Bond or a Premium Bond?
Premium Bond
The price of a convertible will not fall to much less than its ___________, because at that point, the issue's bond value will kick in.
Price Floor
______________ is a key component in defining the amount of downside risk embedded in a convertible, since it provides an approximation of the price to which the convertible will drop should the stock go into a freefall.
Price Floor
Bonds with lower coupons and/or longer maturities have lots of _________________ and are more responsive to changes in market interest rates.
Price Volatility
A bond's ____________, also known as an issue's Par Value, specifies the amount of capital that must be repaid at maturity.
Principal
Because Treasury Inflation Protected Securities offer payments that automatically adjust with inflation, investors do not have to "guess" what the inflation rate will be over the bon's life. In other words, TIPS eliminates ___________________.
Purchasing Power Risk
When a bond is called, the net result is that the investor is left with a much lower_____________ than anticipated.
Rate of Return
Moodly's and Standar & Poor's are 2 of the largest and best known _______________s.
Rating Agency
Mortgage bonds are secured by _____________.
Real Estate
Insured bonds are especially common in which Municipal Bond Market, where the insurance markedly boosts their attractiveness.
Revenue Bond
Of the 2 types of Municipal bonds, which has a higher risk and subsequently provide higher yields?
Revenue Bond
In addition to call features, some bonds may carry _____________s
Refund Provision
_____________s are much like call features except that they prohibit just one thing: the premature retirement of an issue from the proceeds of a lower coupon bond.
Refund Provision
A downward bond rating (e.g., from AA to A) causes the market yield on the bond to _____________.
Rise
When Bond Prices fall that means interest rates ________ing.
Rise
When Interest Rates fall, bond prices________
Rise
As a general rule, adding bonds to a portfolio will, up to a point, reduce the portfolio's __________without dramatically reducing its return.
Risk
Unlike stocks, the vast majority of bonds-- especially corporate and municial bonds--rarely change hands in the _________________.
Secondary Market
The creation of Mortgage Backed Securities and Collateralize Mortgage Obligations (CMO)s quickly led to the development of a new market technology--the process of ______________, whereby various lending vehicles are transformed into marketable securities, much like a mortgage backed security.
Securitization
All Treasury notes and bonds pay _____________Interest payments
Semiannual
Mortgage bonds, collateral trust bonds, equipment trust certificates, and first and refunding bonds are all types of _____________.
Senior Bond
_____________s are secured obligations, which are backed by a legal claim on some specific property of the issuer.
Senior Bond
A _________ has a series of different maturity dates, perhaps as many as 15 or 20, within a single bond offering.
Serial Bond
With___________s, at each annual maturity date, a certain portion of the issue would mature.
Serial Bond
Another difference between _____________provisions and call or refunding features is that a call or refunding provision gives the issuer the RIGHT to retire a bond prematurely, whereas a(n) [answer] provision OBLIGATES the issuer to pay off the bond systematically over time.
Sinking Fund
Interest on corporate bonds is paid semiannually, and _______________s are fairly common.
Sinking Fund
The ____________is a provision which stipulates how the isser will pay off the bond over time. This provision applies only to term bonds, because Serial Issues already have a predetermined repayment schedule.
Sinking Fund
The ____________provision indicates how much of a bond's principal will be retired each year
Sinking Fund
Unlike a call or refunding provision, the issuer generally does not have to pay a call premium with _______________calls. Instead, the bonds are normally called at par for [answer] purposes.
Sinking Fund
__________requrements generally begin 1 to 5 years after the date of issue and continue annually thereafter until all or most of the issue is paid off. Any amount not repaid (which might equal 10% to 25% of the issue) would then be retired with a single "balloon" payment at maturity.
Sinking Fund
4 of the most actively traded ____________s today are: 1. Zero Coupon Bonds 2. Mortgage Backed Securities 3. Asset Backed Securities 4. High Yield Junk Bonds
Specialty Issue
Most ______________s are issued by corporations, although they are being used increasingly by other issuers as well.
Specialty Issue
Most of the time, when Moody's and S&P assing ratings to a particular bond issue, their ratings AGREE. Sometimes, however, an issue carries two different ratings. This is called _________________.
Split Rating
_______________s are viewed simply as "shading" the quality of an issue one way or another.
Split Rating
___________s have outperformed bonds over long investment horizons.
Stock
_______________s have have a claim on income secondary to other debenture bonds.
Subordinated Debenture
A California Municipal Bond is free of California tax if the bondholders lives in California, and its interest income IS subject to state tax if the investor resided in Arizona.
T
A bond investor's return is limited to Fixed Interest and Principal payments as long as the investor holds the bond to maturity.
T
Convertible Bonds generally do not possess high interest rate sensitivity
T
If you hope to recover any conversion premium, it will probably have to come from the ADDED CURRENT INCOME that the convertible provides.
T
Investors in high tax brackets who want to shelter income form taxes find tax exempt bonds appealing.
T
Like stocks, bonds can potentially provide investors with 2 kinds of income: 1. Current Income 2. Capital Gains
T
Municipal Bonds are More attractive to investors with HIGHER taxes (An investor who makes a high annual salary).
T
Normally the obligations of Municipal Bonds are exempt from state and local taxes in the state in which they were issued.
T
The U.S. Treasury does NOT issue Zero Coupon Bonds. Instead, it allows government securities dealers to sell regular Coupon Bearing notes and bonds in the form of Zero Coupon Securities. Essentially, the coupons are stripped from the bond, repackaged, and then sold separately as Zero Coupon Bonds
T
One can determine the level of return a fully taxable bond would have to provide in order to match the after tax return of a lower yielding, tax free issue by computing what is known as a municipal bond's _______________.
Taxable Equivalent Yield
The ________________ only applies to the following situations: 1. To states that have no state income tax 2. To situations where the investor is looking at an out of state bond (which would be taxable by the investor's state of residence) 3. Where the investor is comparing a municipal bond to a Treasury (or Agency) Bond
Taxable Equivalent Yield
Yield on Municipal Bond / (1 - Federal Tax Rate) = ?
Taxable Equivalent Yield
Municipal Bond Yield / 1 - [Federal Tax Rate + State Tax Rate x (1 - Federal Tax Rate)] = ?
Taxable Equivalent Yield for Both Federal and State Taxes
A ___________has a single, fairly lengthy maturity date and is the most common type of bond.
Term Bond
Not all ___________s have sinking fund requirements, but for those that do, the sinking fund specifies the annual repayment schedule that will be used to pay of the issue (the principal).
Term Bond
As with stocks, ___________s in the bond market are made up of both current income and capital gains (or losses).
Total Return
Interest on ________________s is exempt from State Income Tax
Treasury Bond
Many bonds do not trade actively once they are issued. U.S. _______________s are the exception to the rule.
Treasury Bond
______________(or governments, as they are sometimes called) are a dominant force in the Fixed Income Market. If not the most popular type of bond, they certainly are the best known.
Treasury Bond
______________s are issued with a 30 year maturity.
Treasury Bond
Because they are less risky than ordinary bonds, _________________s generally offer lower COUPON RATES than do ordinary Treasury Bonds.
Treasury Inflation Protected Bond (TIPS)
The newest form of Treasury Security (first issued in 1997) is the _________________.
Treasury Inflation Protected Securities (TIPS)
With __________________, if Inflation causes prices to increase by 3%, then the par value of the bond also increases by 3%, so the par value of a $1,000 bond will grow to $1,030 by the end of the year. Coupon payments rise too, because the coupon rate is paid on the inflation adjusted principal.
Treasury Inflation Protected Securities (TIPS)
__________________ are issued with 5, 10, and 20 year maturities, and they pay interest semiannually. They offer investors the opportunity to stay ahead of inflation by periodically adjusting their returns for any inflation that has occurred.
Treasury Inflation Protected Securities (TIPS)
______________s are issued with maturities of 2, , 5, 7, and 10 years.
Treasury Notes
Interest income from these securities is subject to normal federal income tax but is exempt from state and local taxes.
Treasury Securities
Because they sell at such large discounts, ____________s are often sold in minimum denominations (par values) of $10,000. But with their big discounts, you'll probably pay only about half that amount (or less) for $10,000 worth of ten year issues.
Treasury Strip
U.S. Treasury notes and bonds in the form of zero coupon securities are known as _____________s.
Treasury Strip
____________s offer the maximum in issue quality, a wide array of different maturities, and an active secondary market, all of which explains why they are so popular.
Treasury Strip
In addition to T-Bills (a popular short term debt security), the _____________issues notes and bonds. It also issues inflation indexed securities, which are the newest type of [answer] debt.
U.S. Treasury
The _________________establishes the initial yields and coupons on the securities it issues through an auction process.
U.S. Treasury
The difference between the rate on corporate bonds and the rate on government bonds is called the _______________ or the credit spread
Yield Spread
When business conditions are weak and the risk of defaults on corporate bonds increases, the ______________widens as it did in 2007-2008.
Yield Spread
Other things being equal, the cheaper the _____________, the greater the return an investor can earn: For example, a bond with a 6% yield might cost $420, but one with a 10% yield might cost only $240.
Zero Coupon Bond
The following are some disadvantages of ______________s. 1. If rates do move up over time, you won't be able to participate in the higher return. 2. They are subject to tremendous price volatility. 3. The IRS has ruled that these bondholders must pay taxes on interest as it is accrued, even though no interest is actually received.
Zero Coupon Bond
The fully compounded rate of return on a(n)______________is virtually guaranteed at the rate that existed at the time of purchase.
Zero Coupon Bond
______________s have no coupons. Rather, these securities are sold at a deep discount from their par values and then increase in value over time at a compound rate of return. Thus, at maturity, they are worth much more than their initial investment.
Zero Coupon Bond