Bond Basics

Corporate bonds are usually

- Term Bonds - Quoted on a percentage of par basis

Which of the following affect the marketability of corporate bonds?

-Bond Rating -Maturity -Block Size

Corporate bonds are quoted in

1/8ths

When quoting bonds on a yield basis, the difference between a bond priced at a yield of 5.45 and a bond priced at a yield of 5.55 is

10 Basis Points

U.S. Government bonds are quoted in

32nds

A railroad bond is a

Corporate Bond

Corporate bonds are quoted on what basis?

Dollar price

Market uncertainty regarding future interest rate levels would indicate that the yield curve should be

Flat

Zero-coupon bonds trade

Flat

A bond that was originally sold at par is now trading in the market at a premium. The bond is called at par. This action will benefit the

Issuer

Guaranteed Bond

One company issues the bond and, as an added measure of security, another company guarantees to pay it if the issuing company cannot

Income Bonds

Only the principal is promised; interest is paid only when the enterprise's earnings can cover the cost.

Debenture

a type of debt instrument that is not secured by physical assets or collateral - Good faith and credit

The yield curve shows the yields of

different maturities of the same type of security

A percentage of par quote is also known as a

dollar quote

An analysis of yield curves of U.S. Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. This is an indication that investors expect the economy to

enter a recession over the coming months If the yield "spread" between Government bonds and lower medium quality corporate bonds is widening, this means that yields on lower grade corporate bonds are higher than normal relative to yields on Government bonds. This occurs because an excess of investors are buying Governments, pushing their yields down; or an excess of investors are selling lower grade corporate bonds, pushing their yields up.

Exchange rate risk exists when making an investment in a

foreign security when the U.S. dollar strengthens This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening).

When a recession is expected

investors sell corporate bonds (increasing their yields) and buy government bonds (decreasing their yields). Thus, the spread between corporate and government bond yields will widen.

A rising rate of inflation would lead to

lower bond prices and higher bond yields

An increasing market rate of interest would lead to

lower bond prices and higher bond yields

The primary reason that services such as Moody's and Standard and Poor's provide bond ratings is to

measure default risk of different issues They only rate bonds, so no comparisons can be made with equity issues. They do not measure yields, nor marketability risk.

Most of the value of a bond is established by the:

present value of the last payment

Bonds quoted on a yield to maturity basis are generally

serial bonds

The yield to maturity for a discount bond is

stated interest rate + annual capital gain / bond average value

A bond issue where every bond has the same issue date, interest rate, and maturity is a

term bond offering