Chapter 6
3 major bond rating agencies:
1. Moody's 2. Standard and Poor's (S&P) 3. Fitch
Characteristics of treasury notes and bonds:
1. default risk free 2. low returns 3. interest rate risk 4. liquidity risk
corporate bond secondary markets include:
1. exchange market 2. over-the-counter market
the major issuers of debt market securities are:
1. federal 2. state 3. local gov 4. corporations
no matter the agency you choose for bond ratings, there are 2 draft categories:
1. good ones- investment rates 2. not so good- speculant rates (usually higher, larger default risk)
additional complexities in international bond investing:
1. higher risk; political risks higher 2. lower recourse in the event on non-repayment 3. foreign exchange rate movements can significantly impact returns
major purchasers of capital market securities are:
1. households 2. businesses 3. government units 4. foreign investors
motivations for international bond investing:
1. potentially higher returns 2. better diversification
functions of municipal bonds:
1. to fund imbalances between expenditures and receipts 2. to finance long term capital outlays
types of instruments sold on the bond markets:
1. treasury notes (t-notes) and bonds (t-bonds) 2. municipal bonds (munis) 3. corporate bonds
T-note or t-bond coupon rate is rounded down from stop yield to the nearest _____ if needed
1/8th
t-bonds have original maturities of ______
> 10 years
yield/required rate of return of debentures, mortgage bonds, and subordinated debentures:
SD-high Deb- medium mort- low
_____ must be paid by the buyer of a bond to the seller of a bond if the bond is purchased between interest payments
accrued interest
Treasury notes and bonds also trade in very ______
active secondary markets
compare municipal bond returns with fully taxable corporate bonds by finding the ______ for corporate bonds
after tax return
______ are bonds with coupons attached to the bonds
bearer bonds
in the US, borrower may no longer issue ______
bearer bonds
Primary markets: _____ is a public offering in which the investment bank does not guarantee a firm price and acts more as a distribution agent for a fee
best efforts offering
a _____ is the legal contract that specifies the rights and obligations of the issuer and the holders
bond indenture
changes in values of _____ can be used by bond traders to evaluate changes in the investment attractiveness of bonds of different types and maturities
bond indexes
______ reflect both the monthly capital gain and loss on bonds plus any interest income earned
bond market indexes
_____ are markets in which bonds are issued and traded
bond markets
_____ are long term debt obligations issued by corporations and government units
bonds
______ are the major suppliers of funds for municipal bonds and corporate bonds
businesses and financial firms
____ are markets for equity and debt instruments with original issue maturities of more than one year
capital markets
the full or dirty price of a t-note or t-bond is the sum of the _____ & _____
clean price + accrued interest
the US treasury sells t-notes and t-bonds through ________ auctions
competitive and noncompetitive single-bid
_____ are long term obligations issued by corporations
corporate bonds
____ are bonds backed solely by the general credit worthiness of the issuing firm, unsecured by specific assets/collateral, junior in their rights to secured debt
debentures
treasury notes and bonds are _____ because they are backed by the full faith and credit of the US government
default risk free
most secondary trading of t-notes and t-bonds occurs ____ through ______
directly; brokers and dealers
municipal bonds are attractive to household investors because interest is:
exempt from federal and most local income taxes
the annual ____ is equal to annual expenditures (G) less taxes (T) received
federal deficit
Primary markets: ____ is a public offering of municipal bonds made through an investment bank, where the investment bank guarantees a price for the newly issued bonds by buying the entire issue and then reselling it to the public at a higher price
firm commitment underwriting
______ are the major suppliers of funds for t-notes and t-bonds
foreign investors and governments
the price of the bond with accrued interest is called the _______ or the _____, the price without accounting for accrued interest is the ______
full price or dirty price; clean price
_______ are backed by the full faith and credit of the issuing municipality
general obligation (GO) bonds
_____ is the public debt and debt owed to the government borrowed by other departments in the government
gross federal debt
callable bonds have _____ return/yield
higher
competitve bidders submit bid yields and the ____ bid is accepted is called the ______
highest; stop out yield
many general obligation bonds are insured by a third party to _______
improve the credit rating and liquidity
the holder of a bearer bond presents the coupons to the issuer for ____ when they come due
interest payments
Because of their long maturity, t-notes and t-bonds experience wider price fluctuations than money market securities when __________
interest rates change
corporate bonds may be either ______ or _______ grade
investment or speculative
secured debt issues are _____ and require ____ yields relative to unsecured bonds
less risky, lower
T-bonds and t-notes experience _____ because the older ones are traded less frequently than newly issued t-bonds and t-notes
liquidity risk
treasury notes and bonds have ____ to reflect low default risk
low interest rates
for t-notes and t-bonds, a high price paid mean there is a _____
low yield
bond market indexes are managed by _______
major investment banks
treasury notes and bonds are issued in _____ denominations of ______
minimum; multiples of $100
2-year notes are auctioned ______
monthly
______ issued to finance specific projects, which are pledged as collateral for the bond issue
mortgage bonds
_____ are securities issued by state and local governements
municipal bonds
corporate bonds primary markets are identical to that of ______
munis
the _____ is the sum of historical annual federal deficits
national debt (ND)
t notes have original maturities from _____
over 1 to 10 years
corporate bonds are rated by ______
perceived default risk
treasury notes and bonds prices are quoted as _______
percentages of face value
_____ bonds are sold to one or a few qualified institutional investors
private placement
Bidders at the stop out yield may receive a ______ of their allotment
prorata share
3-, 5-, and 10-year notes are auctioned _______
quarterly (feb, may, aug, nov)
_____ are bonds in which payments are made automatically to the owner of record
registered bonds
_____ are sold to finance specific revenue generating projects
revenue bonds
the majority of municipal bonds are ______
revenue bonds
______ municipal bonds trade infrequently due mainly to a lack of information on bond issuers
secondary markets
mortgage bonds are ____
secured debt issues
30-year bonds are auction ______
semi-annually (feb and aug)
_____ mature sequentially, meaning the issue contains many maturity dates, with a portion of the issue being paid off on each date
serial bonds
a ____ is a requirement that the issuer retire a certain amount of the bond issue early as the bonds approach maturity
sinking fund provision
Investment rates have to be cautious as to not fall into the _____ and send bad signals to the market
speculant rates
_____ give bond holders the opportunity to purchase common stock at a pre-specified price
stock warrants
______ are also secured bonds, junior in their rights to mortgage bonds and debentures
subordinated debentures
riskiness level of debentures, mortgage bonds, and subordinated debentures:
subordinated debentures -> debentures -> mortgage bonds
the primary market of t-notes and t-bonds is similar to that of ______
t-bills
______ mature all at once
term bonds
all noncompetitive bidders and competitive bidders who bid less than the stop out receive _____
their full allotment
_____ are issued by the US treasury to finance the national debt and other government expenditures
treasury notes and bonds (t-note and t-bond)
Because of their long maturity, t-notes and t-bonds experience _______ than money market securities when interest rates change
wider price fluctuations