Series 65 Unit 2
What is par or face value worth
$1,000
What is negotiability
-Regularly transferable -Allows sale before maturity -Sells at premium or discount
Who are the major bond issuers
-U.S. Government -Corporations -State Governments
Whats the current yield of DBL 10s of '39@80
12.5%
What is a bond indenture
A document that details the terms between the borrower and lender
According to Standard & Poor's rating system, the 4 highest grades of bonds (from best to lowest grade) are:
AAA; AA; A; BBB.
If the common stock and convertible security are the same price they are
At parity
A bond would be considered speculative below which of the following Moody's ratings?
Baa
Why is YTM also called Market driven yield.
Because it reflects the internal rate of return from the bond investment
Why would you buy a bond at a premium?
Because the interest rates are higher
What is the Moody's Rating tiers ascending (Commas in-between)
C,Ca,Caa,B,Ba,Baa,A,Aa,Aaa For ratings Aa through B 1 indicates the high end, 2 indicates the middle end 3 indicates the low end
What type of security uses moral backing?
Federal Agencies
What is nominal yield
Interest stated on the face value of the bond
A customer wishes to buy a security providing periodic interest payments, safety of principal, and protection from purchasing power risk. The customer should purchase
TIPS
What is more likely to be called a bond selling at premium or a discount.
The bond selling at a premium.
What is a coupon rate
The interest received on a bond
What is the price yield relationship?
The price and interest rates have an inverse relationship.
What is the relationship between yield to maturity and the current yield of a bond at a premium?
YTM<CY
How do you compute the return on an investment
return/investment
RST debenture is convertible to common at $50. If an RST bond is currently trading for $1,200, what is the parity price of the common?
$60 Par value: $1000Conversion price: $50Conversion ratio: (1000/50 = 20) 20.Currently trading: 120Parity stock price is found by dividing $1200 by 20=60
RST debenture is convertible to common at $50. If the common is trading for $45, what is the parity price of the debenture?
$900
What is the yield to maturity formula?
(Annual interest-((Premium or Discount)/years to maturity))/Average price of the bonds
Formula for calculating Treasury securities
(Whole number*10)+((Turn the number after the decimal point/32)10)=Price 90.8=(90*10)+((8/32)10)=902.5
What is the formula for pricing bonds
(whole number*10)+(Fraction*10)= price
Characteristics of Corporate and municipal bond pricing
-Bonds are quoted as a percentage of par ($1,000) -A bond priced at 90=$900 bond -The fractions are 1/8 of a Precent of par so 1/8=1.25, 1/4=2.5, 1/2=5. -So, a bond priced at 90 1/4=902.5
What are the characteristics of state government bonds
-Considered Muni Bonds -Issued by state and local political entities -Unique tax advantages
What are convertible debt securities
-Debt securities issued by corporations that convert into company stock -No convertible government or muni bonds -Conversion is at the discretion of the shareholder -The terms are in the indenture for the conversion rate 50:1 (50 shares:1 Bond) or a price per share ($20 per share) -Current price has no effect on conversion
U.S. Treasury bond characteristics
-Direct Obligation of U.S. Treasury -Pay semiannual interest stated by the par value -Long term maturity (10-30 years) -Mature at par value
U.S. Treasury note characteristics.
-Direct obligation of U.S. Treasury -Pay semi-annual interest stated by the par value -Has intermediate maturities (2,3,5,7, and 10 years) -Matures at par value -Non callable
What are Treasury bills
-Direct short-term obligation of us governments -Highly liquid -Pays no interest and are issued at a discount -13 week bond is the standard "risk free" investment
Characteristics of pricing treasury bonds
-Each whole number=x*10 -Calculate the decimal by dividing it by 32 and multiply it by 10 (.8=(8/32)10= $2.50) -Some quote with a 0 infront to avoid confusion 90.8=90.08
How do you calculate parity price of a Debenture
-First find the conversion ratio -second multiply the conversion ratio by the current stock price =Parity price of debenture
How do you calculate parity prices of the common
-First if given the price establish the conversion ratio (Par/current price) -Second divide the current market price of the convertible by the conversion ratio = Parity price of stock
Characteristics of the U.S. Gov as a bond issuer
-Largest issuer of bonds -Only issuer of U.S. debt securities
What are the characteristics of high yield bonds (Junk bonds)
-Low rating, risk default -Subject to "price erosion" during slow economic times -Highly volatile -Big risk Big reward
What are the four key structure elements of a bond
-Negotiability -Specified Maturity Debt -Payment of Interest -Accrued Interest
Treasury inflation protected securities (TIPS) characteristics
-Protect purchasers from buying power risk -Issued at a fixed interest rate with a semi-annually adjusted to inflation according to the CPI (Consumer price index) -Matures in 5, 10, and 30 years -Available in denominations of $100 treasury bills -Interest is the rate*adjusted principal -Typically have lower rates -Exempt from state and local taxes on interest income but not fed -if the principal is adjusted up the increase is considered reportable income
What are the characteristics of investment grade debt
-Rated in the top 4 categories -Only really eligible to purchase by institutions and fiduciaries -Highly liquid
What are the characteristics of a bond
-Represents the issuers indebtedness -Coupon rate (Rate of return)
Characteristics of interest payments
-Semi annual payments -Interest payments were an obligation of the issuer (Failure to pay is a sign of insolvency) -Corporate debt is pre-tax expense (dividends are post tax) -If its sold at a discount the interest makes up the difference
Who are the tow main bond raters
-Standards and Poors -Moodys
What are the intervals for issuing T bills
-T bills are issued weekly with maturities of 4, 13, and 26 weeks -T bills with maturities of 52 weeks are issued every 4 weeks
What is Accrued Interest
-The amount of interest gained since the last payment -Buyer pays the market price and any accord interest
What is the specified maturity date?
-The date Debt securities are redeemed by the issuer -Can be short one day never longer than a year
What Relationship do interest rates and price have
-They share an inverse relationship -If interest rates go up the price goes down
Disregarding commissions, an investor selling a U.S. treasury bond for a price of 104:16 will receive
1,045
A 4.67% convertible debenture is selling at 102. It is convertible into common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at party with the debenture, the price of the stock would be?
25.50
Five precent XYZ debentures are trading for 1,250. Other similarly rated bonds are being offered at 4.25%. What is the current yield on the 5% XYZ debentures?
4%
Whats the current yield of a stock that has a annual dividend of $3 priced at $60
5%
Whats the current yield of DBL 10s of '39@120
8.33%
What is a call feature?
A bond that can be redeemed before maturity at the issuers option.
When Treasury bills are issued, they are quoted at
A discount from principal with no coupons attached
What does DEF 5s35 @106 mean
All caps letters mean=Issuer 5=Coupon rate 35=2035 maturity date 106=price ($1,060)
Why does YTC smaller than YTM
Because you receive a smaller return due to redeeming bonds before the maturity date
Which of the following statements regarding bond interest is true?
Bond prices have an inverse relationship to interest rates.
What is considered a Logterm debt security
Bonds
What is considered a debt security
Bonds and commercial paper/ Treasury Bonds
How do you commute the amount of shares you will get from an indentures stated price
Bonds are priced at 1,000 so take the stated price and divide 1,000 by that number
When a bond with a 6% coupon is selling for 90, each of the following statements is correct, EXCEPT A. the current yield is approximately 6.67% B. the bond is selling at a discount C. the bondholder will receive two semiannual interest payments of $27 each D. the yield to maturity is slightly higher than the current yield
C
Where do most government issues trade?
Capital Market
What is the Standards and Poor's Rating tiers ascending (Commas in-between)
D,C,CCC,B,BB,BBB,A,AA,AAA + and - show strength in category
What are the two primary types of government backing?
Direct backing and Moral backing
If the bond has a YTM less than its YTC, the bond is trading at
Discount
When is current yield < coupon?
Discount
How do you find the conversion ratio when computing parity
Divide par by the conversion price= x shares
True or False Purchasing a bond at a discount will always result in getting back par, which means less than the original investment.
False
True or False Supply and Demand have no effect on a bonds current market price.
False
True or false If the market price changes the interest payments change with it
False
True or False The interest paid on the bond is always a variable percentage of par.
False (Interest is a fixed precentage)
Why do corporations issue Bonds
Finance opperations
What is the time period of a longterm debt
Held for at least 5 years and typically 10-30 years
What happens when a bond goes under review
It is similar to getting a credit score check
What does yield to maturity measure?
It measures the gain or loss on a bond at maturity
What is the Capital market
It serves as the market for long term securities.
What is the Money Market
It serves as the market for short term securities
What does debt capital represent
Loans from the Issuer (company) to the investor
Risk reward relation ship
More risk = More Reward
How do you compute how much a bond pays annually
Multiply the rate by 1,000
If the bond has a YTM and CY that are equal, the bond is trading at
Par
When is current yield = coupon?
Par
If the bond has a YTC lower than its CY, it is trading at
Premium
When is current yield > coupon?
Premium
What is selling at a Premium?
Selling over par
What is selling at a Discount?
Selling under par
What is parity price
Setting prices equal so you can compare convertibles and common stock
how do you calculate the return on a current investment
The annual interest in dollars/ the current market price
Why would you buy a bond at a discount?
The higher payout of face value
What makes yield to call calculations different?
They reflect the yield of the early redemption date and
What type of security uses direct backing?
Treasury Bonds
True or False Bonds always mature at par
True
True or False Interest rates determine the current bond price.
True
True or False Par value is priced at par (1,000) because that is how much the issuer is borrowing.
True
True or False Purchasing a bond at premium will always result in getting back par, which means receiving less than the original investment.
True
True or False: When government is referred to on the test it's referring to the fed
True
True or False Regardless of market price of the bond, interest checks remain the same.
Ture
How much does a bond pay semi annually with a 6% tax rate
Two payments of $30
What is a debenture
Unsecured loan certificates
What is the relationship between yield to maturity and the current yield of a bond at a discount?
YTM>CY
What is the true test of value
Yield to maturity or true yield
