Debt Securities

Banker's Acceptances

Are used to finance foreign trade

bond point

$10

Basis Point

1 basis point = 1/100th of a point or 1/100th of 1% of the bond

How can the seller of a put option be "covered"?

1. by having funds on deposit equal to the aggregate exercise price 2. by obtaining a bank guarantee letter 3. by being long a put with an equal of greater exercise price

How can the seller of a call option be "covered"?

1. by owning the underlying stock 2. by obtaining an escrow or depository receipt 3. by owning a call option with an equal or lower exercise price 4. convertible bonds or warrants provided they are immediately convertible or exchangeable for common stock and do not expire before the shot call(s)

par value of a bond

1000

Junk bonds

AKA high yield bonds - issued by companies without a long track record of sales and earnings or companies that have questionable credit strength

Debentures

An instrument of debt backed by the "good faith and credit" of the issuing corporation only. They are unsecured debts

Current Yield Formula

Annual Interest / Current Market Price

Parity Bonds

Bonds which have rights related to collateral that are equal to the rights of previously issued bonds

The Trust Indenture Act of

Federal act that requires that all corporate bonds and debentures be issued under an indenture or deed of trust. The act specifies the rights and duties of the issuer, underwriter, and investor to protect the bondholders and their interests

Coupon Rate (Nominal Yield)

Fixed rate of interest that is paid to investors

Series bonds

Have different issue dates and usually the same maturity date

Corporate Equivalent Yield Formula

Municipal Yield / (100% - Investors Tax rate) = Taxable Equivalent yield

Income or Adjustment Bonds

Often issued by companies in financial difficulty trying to avoid bankruptcy. They promise to pay interest only if they have sufficient earnings

How often do bonds pay interest?

Semi-annually

Money Market Instruments

Short term debt instruments with maturities of 12 months or less and most are highly liquid

Premium bond

The bond's market price is above par value

Industrial Development Bonds (Industrial Revenue Bonds)

The municipality approves the sale of the bonds "on behalf of" a company to construct or purchase facilities that are then purchased by or leased to a private user. This enables the company to borrow at tax free rates

How are general Obligation bonds secured?

They are secured by taxes collected by the municipality. They are not secured by revenues from revenue-generating facilities (these would be revenue bonds)

Which of the following is NOT a characteristic of Notes issued by the U.S. Treasury? [A] All U.S. Treasury Notes have call features. [B] Maturities on these securities are typically intermediate. [C] Quotes on these securities are listed as a percentage of the note's par value. [D] Interest is paid on these securities semi-annually.

[A] All U.S. Treasury Notes have call features. U.S. Treasury Notes have intermediate term maturities in the 2-10 year range. These securities are quoted as a percentage of par and pay interest semi-annually like U.S. Treasury Bonds. T-Notes are NOT issued as callable.

If a bond is selling at a premium, It has a coupon rate lower than the current yield. The face value is lower than the market price. It is of higher quality than another bond selling at a discount. [A] II [B] I and II [C] I and III [D] II and III

[A] II A bond selling at a premium would have a coupon rate higher than the current yield so (I) is incorrect. Bonds sometimes trade at premiums simply because of changes in interest rates, and it has nothing to do with the quality of the bond, so (III) is incorrect. The face value is lower than the market price, is true because the price of a bond selling at a premium will be more than the face value of $1,000, so (II) is correct.

Junk bonds are also called [A] high yield bonds [B] low yield bonds [C] investment grade bonds [D] revenue bonds

[A] high yield bonds Junk Bonds or high yield bonds are issued by companies that have little or no track record of sales or earnings, have a BB rating or lower or no rating, or are issued by companies that are in financial distress.

A bond selling at a premium to its par value means [A] the current yield will be lower than the nominal yield. [B] the current yield will be equal to the nominal yield. [C] the current yield will be higher than the nominal yield. [D] general level of interest rates are higher than when the bond was first issued.

[A] the current yield will be lower than the nominal yield. Bond yields and prices have an inverse relationship meaning that as one increases the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal (or par) yield.

Mr. Jones purchased $10,000 par value of 8% bonds to yield 5%. On the normal interest payment date, he will receive: [A] $250 [B] $400 [C] $500 [D] $800

[B] $400 "Normal" interest payment date is semi-annual and based on the coupon rate not yield, therefore: $10,000 x .08 = $800 (annual interest) $800 2 = $400 (semi annual payment)

Bobby is currently in the 25% tax bracket. He owns a municipal bond yielding 4%. He has also been looking for a few corporate bonds to add to his portfolio, but he wants to make sure that the yield after taxes is at least equal to what he is receiving on his munis. What is the corporate equivalent yield of Bobby's municipal bond? [A] 4% [B] 5.33% [C] 7.25% [D] 16%

[B] 5.33% In order to find the taxable equivalent yield, you would divide the yield on the municipal bond (4%) by 100% less the investor's tax bracket (25%). 0.04 / (1.00-.25) = 0.04 / 0.75 = 0.05333 or 5.33%. So the corporate equivalent yield would be 5.33% and any corporate bonds in Bobby's portfolio would have to have a yield equal to or higher than 5.33%

Which of the following is a corporate bond quote? [A] 7.20 - 7.00 [B] 75 1/2 [C] 75.25 - 75.30 [D] 7.50%

[B] 75 1/2 Municipal Dollar and Corporate bonds are quoted using fractions, in eighth equivalents. "B" represents an 8th equivalent and would therefore be a corporate bond quote. "A" represents the discount on a Treasury Bill since the Bid is higher than the Ask. "C" represents a quote on a Treasury Bond because it is quoted using decimals and anything following the decimal would go over 32. "D" would represent the yield to maturity on a municipal bond since municipal bonds can be quoted at either a dollar price or at their yield to maturity.

An investor living on a fixed income has $10,000 to invest. His investment objectives are safety of principal and capital appreciation. Which of the following would be the most suitable investment? [A] Common stock in a growth company [B] A convertible corporate bond, rated grade A or better [C] U.S. Savings bonds [D] Money market fund

[B] A convertible corporate bond, rated grade A or better A convertible corporate bond graded A or better would most likely achieve the results that the investor desires. The fact that the bond is rated A or better means that it is a high quality bond with little chance of defaulting on debt service payments. The convertible feature will offer the investor the appreciation potential that he is seeking because an increase in the underlying stock will cause the market value of the bond to also increase.

When evaluating investments for a client, a municipal bond portfolio would be MOST appropriate for which of the following investors? [A] A young investor who has few liabilities who is seeking growth and needs no income [B] A middle-aged investor in a high tax bracket who is seeking income but looking to reduce tax burden [C] A middle-aged investor in a middle tax bracket who is investing funds in their retirement plan [D] A senior investor in a low tax bracket looking for a combination of income and growth

[B] A middle-aged investor in a high tax bracket who is seeking income but looking to reduce tax burden Municipal bonds and municipal bond funds are most appropriate for investors who are seeking income from the fixed-income securities, but also looking to reduce their tax burden, since munis are not subject to federal income tax. These would not be appropriate for investors with no need for income or for investment in retirement plans, since retirement plans are tax-deferred and higher rates of growth from other taxable securities would be more appropriate. A muni bond portfolio would not be appropriate for someone seeking both income and growth, as fixed-income securities don't provide high levels of growth.

On a fully registered bond, a customer would receive his interest in what manner? [A] By sending in one of the coupons attached to the bond. [B] By check mailed to him semi-annually. [C] By presenting the bond to the paying agent. [D] By check mailed to him once a year.

[B] By check mailed to him semi-annually. Interest on bonds is paid semi-annually. Because fully registered bonds do not have coupons attached, B would be correct; the check would be mailed to the investor semi-annually.

The two issuance formats used when Corporate Bonds are issued, are Serial Form and Series Form. In describing Series Form, the issue would have Different issuance dates The same issuance date Different maturity dates The same maturity date [A] I and III [B] I and IV [C] II and III [D] II and IV

[B] I and IV

Which of the following are CORRECT statements in relation to sinking fund provisions included in corporate bond indentures? Such provisions require mandatory retirement of debt by the issuer. Such provisions allow the voluntary retirement of debt by the issuer. Such provisions make the bond issue less attractive to investors by removing safety from the issuance. Such provisions make the bond issue more attractive to investors by adding a level of safety to the issuance. [A] I and III [B] I and IV [C] II and III [D] II and IV

[B] I and IV Sinking fund provisions are attractive to investors because they require mandatory retirement of debt by the issuer on a specified date or at specified dates. This adds to the safety of the bond issuance, because the issuer is required to have money on hand and available to retire the securities at the times specified.

List the yields from lowest to highest, if a corporate bond is trading at a discount: Nominal yield Current yield Basis [A] II, III, I [B] I, II, III [C] III, I, II [D] III, II, I

[B] I, II, III Nominal Yield = Coupon Rate Current Yield = Annual Interest Market Price Basis = Yield to Maturity and see chart in study material

Mr. Smith, your client, has maintained about 80% of his portfolio in fixed income securities. Interest rates are expected to decline over the next 12 month period. Mr. Smith calls you because he is concerned about this prediction and his portfolio. Which of the following recommendations would be appropriate for you to give to Mr. Smith? [A] Move 50% of his portfolio into equity securities [B] Leave his portfolio the way it is now [C] Move 60% of his portfolio into Money Market funds [D] Move 25% of his portfolio into Limited Partnerships

[B] Leave his portfolio the way it is now Of the choices offered the best choice would be to leave his portfolio in fixed income securities. If interest rates decline the value of his bonds will go up and his overall portfolio value will increase. He also would be able to continue to receive the income from the coupons on the bonds he currently owns.

One of your clients purchases a callable corporate bond. The bond is callable at 106.55. What will the customer receive if the corporation calls the bonds and the customer tenders them back to the corporation? [A] The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be subtracted from that figure. [B] The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be added to that figure. [C] The customer will receive par value for the bond of $1,000 and will receive $65.50 in accrued interest. [D] The customer will receive par value for the bond of $1,000 and will receive $106.55 in accrued interest.

[B] The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be added to that figure. This is an example of a corporate bond being quoted as a percentage of par. The 106.55 is the equivalent of 106.55% of the par value of $1,000. This means that the bond's call value is $1,065.50 (1.0655 x 1,000) or ($10 X 106.55 = $1,065.50). The bond will be called at this call price and on top of that, the investor can expect to receive any accrued interest that would be due at the date of call on top of the call price.

If the basis price of a bond is 5.25 and the coupon rate 4.75, the bond is selling [A] at par. [B] below par. [C] above par. [D] with accrued interest.

[B] below par. If the basis (yield to maturity) is higher than coupon, that tells you that the bond's price is below par. Lower price equals higher yield. (Basis)

A bond's par value represents the bond's [A] market price and guaranteed payout on the bond. [B] face value and the amount of principal that the issuer is expected to repay at maturity of the bond. [C] value as a sum of all interest payments that will be made on the bond over its lifetime. [D] total impact as a liability on the balance sheet of the issuing entity.

[B] face value and the amount of principal that the issuer is expected to repay at maturity of the bond. A bond's par value represents the bond's face or principal value, normally $1,000. This is the amount that the issuer is expected to repay at maturity of the bond. It is also the amount from which the coupon payments are based. It is not the bond's market price (though the two numbers can be the same). Principal on a bond is never a "guaranteed payout". Though par value must be returned at maturity, the total impact of the bond as a liability will also include interest payments.

When an investment grade corporate bond is downgraded to a Junk bond, it is referred to as a: [A] sleeper [B] fallen angel [C] debenture [D] general obligation

[B] fallen angel

A decrease of 10 basis points for a $1,000 bond would represent which of the following decreases in the price of the bond? [A] $100.00 [B] $10.00 [C] $1.00 [D] $.10

[C] $1.00 Let's first discuss the difference between a basis point and a bond point. A basis point is the measure of the change in yield. It is a small number, so a basis point measures that small change. A basis point is equal to 1/100th of 1% of a bond or $.10. So on a $1,000 bond, one basis point is equal to $.10. So, ten basis points would be equal to $1.00. (10 X $.10 = $1.00) A bond point deals with the price of a bond. A bond point is equal to 10 dollars.

ABC Corporation wants to issue $20,000,000 of debentures each of which would be convertible in 20 shares of common stock. How many common shares are issued if all the debentures are converted? [A] 100,000 [B] 200,000 [C] 400,000 [D] 600,000

[C] 400,000 $20,000,000 worth of bonds divided by par of $1,000 = 20,000 bonds 20,000 bonds X 20 shares per bond = 400,000 common shares issued

What is the current yield on a corporate bond trading at 103 with a 7% coupon? [A] 6.3% [B] 6.5% [C] 6.8% [D] 7.0%

[C] 6.8% The current yield on a corporate bond equals the annual interest income divided by the market price of the bond ($70 / 1,030 = 0.06786 or 6.8%). In this case, the annual interest income is $70 ($1,000 par value x 7% coupon = $70) and the market price of the bond is $1,030. (103 points x $10 per point = $1,030).

An issuer of bonds sees that interest rates have gone down. The issuer wishes to redeem an existing bond issue and refund it with new bonds that have a lower coupon rate. What bond feature is necessary in order for the issuer to effectively complete their desired refunding? [A] A conversion feature [B] An anti-dilution feature [C] A call feature [D] A put feature

[C] A call feature If an issuer of bonds wishes to redeem existing bonds and issue new bonds in a refunding, a call feature would be necessary on the initial bond issuance in order to do so. Conversion features allow investors to exchange debt securities for equity securities. Anti-dilution features or clauses require adjustments to conversion features when new issues of stock or stock dividends are paid. Put features allow the investor to "put" or tender their bond back to the issuer on specified dates throughout the lifetime of the bond.

Commercial paper issued by an industrial company may be rated by all of the following credit rating services EXCEPT: [A] Standard and Poor's [B] Moody's [C] A.M. Best [D] Fitch

[C] A.M. Best A.M. Best only rates insurance companies. The other companies rate various industries and all kinds of debt instruments.

During a discussion with a client, the client indicates that he feels that interest rates are going to be going down soon. If the client wishes to invest according to this assumption, which of the following recommendations should the registered representative give to the client? The client should begin a pattern of swapping his existing bonds for bonds selling at a premium. The client should attempt to increase the overall level of call protection on his bond portfolio. The client should attempt to extend the overall maturity on his bond portfolio. The client should attempt to shorten the overall maturity on his bond portfolio. [A] I and III [B] I and IV [C] II and III [D] II and IV

[C] II and III If the client feels that interest rates are going to go down, the client should attempt to lock in the longest maturities possible in their portfolio. This calls for extending the overall maturity of the bond portfolio. The client should also attempt to eliminate the possibility of early calls of their bonds and so the client should increase the call protection for their portfolio.

Which of the following statements are generally accurate regarding securities issued by agencies of the U.S. Government? Though these securities pay interest, only the principal is considered to be a safe and liquid. The U.S. Government does not fully back these issues, but the issues are backed by the federal agency. These securities pay interest and both the principal and interest payments are considered to be safe. The U.S. Government fully backs the issues of federal agencies. [A] I and II [B] I and IV [C] II and III [D] II and IV

[C] II and III Issues of government agencies are not fully backed by the U.S. Government. These issues are backed, however, by the federal agencies that issue them. Federal agencies are considered to be safe investments and this is with regards to both the interest and principal.

Which of the following securities may offer convertible features that allow the holders to exchange the securities for other issues of the company? Common stock Preferred stock Corporate bonds Certificates of deposit [A] I and II only [B] I and III only [C] II and III only [D] I, II, III and IV

[C] II and III only Of the choices offered, only preferred stock and bonds could be issued as convertible. Common stock is never issued as convertible. Certificates of Deposit are issued by banks, not by corporations and are never issued as convertible.

Which of the following statements are true regarding equipment trust certificates? Default is common due to financial problems. They are normally serial issues. They are most often issued by transportation companies. They are secured by specific corporate assets. [A] I and IV [B] II and IV [C] II, III, and IV [D] I, II, III, and IV

[C] II, III, and IV II, III, and IV are true regarding Equipment Trust Certificates. Choice I is not true because Equipment Trust Certificates rarely ever default due to the fact that the companies do not want to lose their equipment.

List the yields from lowest to highest, if a corporate bond is trading at a premium. Nominal Yield Current Yield Basis [A] I, II, III [B] II, III, I [C] III, II, I [D] III, I, II

[C] III, II, I Because the price is high, the current yield and basis will be less than the nominal yield. Remember basis always has the greatest reaction.

The Alternative Minimum Tax (AMT) may be applied to shareholders of a mutual fund that has which of the following securities contained within? [A] U.S. Treasury Bills [B] Convertible bonds [C] Municipal bonds issued for private industry purposes [D] Investments in blue chip securities

[C] Municipal bonds issued for private industry purposes For individuals, the AMT is computed by adding tax preference items to taxable income. Among those items is interest earned on private activity municipal bonds.

Which of the following amounts is typically paid to the holder of a normal corporate bond at maturity? [A] The market price of the bond at the time of purchase [B] All interest payments [C] The par or face value that is printed on the bond [D] No amount is paid at maturity of a bond

[C] The par or face value that is printed on the bond With a normal corporate bond, the bond's par or face value is repaid to the bondholder at maturity. Buyers of bonds can pay more (premium) or less (discount) than the par value of a bond as a market price, but this does not affect the amount paid at maturity, which is fixed at par value. Interest payments are made over the lifetime of a normal bond and are not all paid at maturity.

Which of the following represents funded debt? [A] U.S. Treasury note [B] municipal bond [C] corporate mortgage bond [D] flower bond

[C] corporate mortgage bond Funded Debt is a corporate term used to describe debt that has one year or more to maturity, therefore the corporate mortgage bond would represent funded debt.

An investor's portfolio includes 10 corporate bonds and 200 shares of common stock. If both securities decline in value by ½ point the dollar loss is [A] $110.00 [B] $50.00 [C] $105.00 [D] $150.00

[D] $150.00 A ½ point on a stock equals $ .50 A ½ point on a bond equals $5.00 Therefore, 200 shares x $ .50 per share = $ 100 decline 10 bonds x $5.00 per bond = $ 50 decline $150 Total decline in value

A conservative investor with a need for income tells his registered representative that he understands that both bonds and preferred stock are considered to be fixed income securities, but he doesn't understand the difference between the two investments. The representative could explain that all of the following are differences between two investments EXCEPT: [A] Bonds mature on a set date. Preferred stock has an indefinite life [B] Bonds have a priority over preferred stock on liquidation of the assets of the company [C] Bondholders have a legal right to receive interest payments. Preferred stockholders only have a right to dividends if and when they are declared by the Board of Directors [D] Both bondholders and preferred shareholders have a right to vote

[D] Both bondholders and preferred shareholders have a right to vote Bondholders are creditors of the company and don't have a right to vote. Preferred shareholders are equity owners, but unlike common shareholders, they usually don't have a right to vote. They may have a right to vote under limited circumstances (e.g. the company is in financial difficulty).

When a conversion takes place, what occurs? [A] Existing bonds are traded into the issuer for new bonds. [B] The issuer performs a second issue of bonds to retire an existing issue with the proceeds. [C] The issuer uses excess cash on hand to retire bonds prior to their original maturity date. [D] Existing bonds are tendered to the issuer for equity securities, most frequently common stock.

[D] Existing bonds are tendered to the issuer for equity securities, most frequently common stock. The most accurate description listed when it comes to conversion is the tender of bonds for equity securities. A conversion feature on a bond or preferred stock allows the holder to "tender" or turn in the bond or preferred stock in exchange for shares of common stock. Each of the other items listed applies to early retirement of existing bonds or refunding of existing bond issues.

Which of the following are characteristics of corporate "Junk Bonds." They are: Issued by corporations with questionable credit strength. Also called "high-yield" bonds. Sometimes used to finance the takeover of one corporation by another. Bonds issued with credit ratings of BB or lower. [A] I, II, III [B] II and III [C] II and IV [D] I, II, III, and IV

[D] I, II, III, and IV

Which of the following is issued by state and local governments and pays interest, typically semi-annually? [A] Subscription Rights [B] Subscription Warrants [C] Corporate Bonds [D] Municipal Bonds

[D] Municipal Bonds Municipal bonds are issued by state and local governments and typically pay interest semi-annually. Corporate bonds are issued by corporations, but would pay interest semi-annually. Rights and warrants are derivative securities that allow an investor to purchase a specific number of shares at a specific price on a short-term (Rights) or long-term (warrants) basis. Rights and warrants do not pay dividends or interest.

A client is evaluating purchasing corporate bonds versus purchasing municipal bonds. In their evaluation, the client wishes to evaluate the equivalent yield required by a corporate to compensate for the tax benefits of the municipal bonds. Which of the following is the formula used to determine tax-equivalent yield? [A] The client should multiply the tax-exempt yield of the muni by their tax rate. [B] The client should divide the tax-exempt yield of the muni by their tax rate. [C] The client should multiply the tax-exempt yield of the muni by (100% - their tax rate). [D] The client should divide the tax-exempt yield of the muni by (100% - their tax rate).

[D] The client should divide the tax-exempt yield of the muni by (100% - their tax rate). Finding the taxable equivalent yield of a municipal bond is important in determining whether a corporate has a comparable or adequate return in relation to the level of risk and taxation. To find it, take the tax-free yield of the muni and divide that by 100% minus the investor's tax rate. Example: An investor in the 28% tax bracket is looking at a muni yielding 5%. What is the taxable equivalent yield? 5% / (100% - 28%) = 0.05 / 0.72 = 0.0694 or 6.94% So in this case, a corporate would have to yield 6.9% in order to be equivalent to a tax-free muni yielding 5%.

Which of the following most frequently issue Equipment Trust Certificates? [A] High tech companies. [B] Aircraft construction companies. [C] Utility companies. [D] Transportation companies.

[D] Transportation companies. Transportation companies are the most frequent issuers of Equipment Trust Certificates, where the debt is secured by the rolling stock of the company, such as airplanes, trucks, and cargo ships.

If a customer believes that interest rates will decline substantially, she should invest in [A] a 1 yr Certificate of Deposit @ 10%. [B] a long term variable rate Corporate Bond yielding 12 1/2%. [C] a long term Corporate Bond with a coupon rate of 10%, callable in 3 years @ par, at a 9% basis. [D] a long term Corporate Bond with a coupon rate of 10% at a 12% basis, non callable.

[D] a long term Corporate Bond with a coupon rate of 10% at a 12% basis, non callable. Bonds have an inverse reaction to interest rate movements, when interest rates go down the prices of outstanding bonds will rise. In addition, long term bonds react the greatest to interest rate changes compared with bonds with shorter maturities. The non callable feature stated in the correct answer is also appealing because it gives the investor some protection against her bonds being called by the issuer when interest rates fall.

Zero coupon bonds are frequently used to: [A] amortize the cost of the bond [B] provide a steady stream of dividend income [C] provide a steady stream of interest income [D] accumulate capital to fund a particular investment goal

[D] accumulate capital to fund a particular investment goal Zero coupon bonds do not make semi-annual interest payments, but instead are sold at a deep discount from their face value by the issuer. They are generally purchased by investors that do not need the semi-annual income and want to accumulate capital.

Alternative Minimum Tax (AMT)

an alternative federal income tax imposed on high income taxpayers. It is designed to recoup tax revenues that are reduced by tax advantaged investments by imposing a minimum tax rate. If the investor's tax rate is below the AMT, the investor will have to pay the higher AMT rate

Collateral Trust Certificate

an instrument of debt issued by a company using securities of other companies as collateral (mostly stocks and bonds). The securities are placed on deposit with a trustee while the collateral trust certificates are outstanding

mortgage bond

an instrument of debt secured by real property owned by the issuing corporation

Equipment trust certificate

an instrument of debt that is generally issued by transportation companies to purchase new equipment. These bonds are secured by the new equipment. These bonds are usually not callable, are normally issued in a serial form, and rarely ever default

Revenue Bonds

bonds for which the payment of bond interest and principal depends on specific identified sources of revenues such as user charges, lease payments, licenses fees, or "special" taxes

Guaranteed bonds

bonds guaranteed by a company other than the company that issued them

Municipal bond

bonds issued by state and local government entities such as cities, counties, school districts, authorities, and the state

General Obligation Bonds (GOs)

bonds that are a general obligation of the issuing municipality

Bonds

classified as a debt security and the investor becomes a creditor who receives interest payments for lending capital

Taxes on a corporate bond

corporate bonds are fully taxable, which means they are taxed at the Federal, State, and Local levels

Calculating the annual coupon amount

coupon rate x par value

Subordinated debentures

debentures which hold a lesser or "junior" claim than other debenture bonds and thus would be paid only after higher level debenture claims have been satisfied

long term bonds react the ____ to changes in interest rates

greatest

serial bonds

have one issue date and staggered maturity dates

Yield to Maturity (Basis)

long-term yield on a bond that is expressed as an annual rate. it takes into account the purchase price, redemption value, coupon rate, and time to maturity

convertible bonds

may be converted into common stock at the option of the bondholder

Callable bonds

may be redeemed by the issuer at a set premium over the par value after a specified date

Conversion formula for convertible securities

par value of the bond of preferred stock / conversion price = common shares received upon conversion

Bearer bonds

physical bond certificates and are not registered in the investor's name. They have interest coupons attached. Bonds are no longer issued in this form

Interest rates go UP,

prices on bonds go DOWN

Interest rates go DOWN,

prices on bonds go UP

short term bonds react the ____ to changes in interest rates

quickest

Sinking fund

represents money set aside to redeem the company's bonds, debentures, or preferred stock

Zero coupon bonds

sold at a deep discount and pay no interest while the bonds are outstanding

who pays interest and principal on Industrial Development Bonds?

solely by the company, not the municipality

Discount bond

the bond's market price is below par value

term bonds

the entire issue of bonds has the same maturity date

Refunding

the sale of a new issue of bonds, the proceeds of which are used to retire an outstanding issue

registered form of bonds

these bonds are registered in the investor's name and interest payments are sent directly to the investor by the corporation's paying agent