Series 7: Part 2 Unit 4 Debt Securities

An investor holds 5 ABC 3% bonds, due 2030. She will receive semi-annual interest income of

$75.00 The investor will receive a total of $75 every six months. She will collect $15 per bond, so owning 5 bonds will provide $75 twice each year.

A 3% bond with a YTM of 2.5% is trading

Above Par When the coupon yield is higher than the YTM, the bond is trading at a premium (above par).

An investor holds an ABC Corporation bond, coupon 4%, purchased at 95. The current yield is

4.2% Current yield is found by dividing return by investment. In this case, the annual coupon is 4% ($40), and the investment is 95 ($950).

A 5% bond has a YTM of 4.5%. This bond has a basis yield of

4.5%. 4.5%.

Eurodollar bond

A bond issued by a Swiss company, sold outside the United States and the issuer's country, but for which the principal and interest are stated and paid in U.S. dollars, is the definition of a

Corporate bonds are considered safer than common stock issued by the same company because

A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation.

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately

A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109% or approximately 7.1%.

A customer purchased a 5% bond yielding 6%. A year before the bond matures, new bonds of the same quality are being issued at 4%, and the customer sells the 5% bond. The customer probably did which of the following? Bought it at a discount Bought it at a premium Sold it at a discount Sold it at a premium

I and IV The customer purchased the 5% bond when it was yielding 6% (at a discount). The customer sold the bond when other bonds of like kind, quality, and maturity were yielding 4%. The bond is now at a premium. Therefore, the customer realized a capital gain.

Two conservative customers in their 50s are interested in preserving principal and high-current income from their investments. From first to last, in which order are the following bonds ranked in meeting your customer's needs? I.) Fort Worth Gas 5¼s of 35, rated A1 II.) San Antonio Transit 5¼s of 35, rated AA+ III.) Texas Telecom 5¼s of 35, rated AAA IV.) Dallas Electric 5¼s of 35, rated AA-

III, II, IV, I AAA, followed in order by the bonds rated AA+, AA-, and A1.

Many investors, especially institutions, diversify their fixed-income portfolios by purchasing bonds issued outside of the United States. When a French corporation issues a bond denominated in Swiss francs, it is known as

The term eurobond is the generic name given to a long-term debt instrument issued and sold outside the country of the currency in which it is denominated. An example would be eurosterling bonds where a non-U.K. entity issues a debt denominated in British pounds. In our question, the French company is borrowing in Swiss francs instead of the domestic currency (the euro). Sovereign is issued by the sovereign government, e.g., U.S. Treasury bonds.

The XYZ Corporation has issued some 4% callable bonds maturing in 20 years. The bonds are callable at 102 commencing in 10 years. Regarding these bonds, which of the following statements is not correct?

These bonds will appreciate faster in declining interest rate markets than comparable bonds without a call feature. All things being equal, callable bonds will not show as much appreciation in a declining interest rate market as bonds without a call feature. Logically, as interest rates fall, those bonds will be called making them less attractive than bonds where the higher interest rate payments will continue until maturity

A customer buys a 5% bond at par. The bond is callable in five years at par and matures in 10 years. Which of the following statements is true?

YTC is the same as YTM. If a bond is trading at par, the nominal yield (coupon rate) equals current yield equals yield to maturity (YTM) equals yield to call (YTC).

If a bond trades at a premium, the order of yields from lowest to highest is

YTC, YTM, CY, NY

The "basis" yield is the

Yield to maturity

Eurobond

bond denominated in a currency other than that of the country in which it is sold

The LLAW Manufacturing Company issued a 6.25% debenture 5 years ago. The bond is callable in seven years at 102 and matures in 15 years. The bond's current yield is 4.23%. If one of your customers decided to purchase this bond, they would have to understand they would be

paying a premium for the bond. The first thing to notice is that the current yield is below the nominal (coupon) rate. That automatically tell us the bond is selling at a premium. Whenever a bond is selling at a premium, in increasing order, the order of the yields is yield to call, yield to maturity, current yield, and nominal yield. Therefore, if the current yield is 4.23%, the yield to mature cannot be higher than that; it must be less. As we say in the LEM, "if you pay more, you get less" and "if you pay less, you get more." The issuer pays the call price when, and if, the bond is called.

As interest rates fluctuate over time, the par value of a corporate bond will

remain the same. The par value of a bond is fixed ($1,000) and will not change as the result of changes in interest rates.

When comparing a 1% bond with a 5% bond, the duration of

the 1% bond will be longer than that of the 5% bond Generally speaking, the duration of a low coupon bond will be longer than the duration of a high coupon bond.

A 15-year bond is purchased at 102 and is callable at par beginning in 3 years. In this case,

the yield to maturity will be higher than the yield to call. For bonds trading at a premium, the yield to call will be lower than the yield to maturity.

Most coupon bonds pay interest

twice per year, at the beginning or middle of the designated month. Typically, on the 1st or 15th day of the designated month.