personal money management chapter 13 (bonds)

zero-coupon bond

a bond back by the power of a government unit to levy taxes to repay the debt

agency bond

a bond issued by a federal agency

municipal bond

a bond issued by a state or local government

callable bond

a bond that can be paid off early

junk bond

a bond that has a low rating or no rating at all

coupon bond

a bond that is NOT registered by the issuing company (also called a bearrer bond)

secured bond

a bond that is backed by specific assets as collateral

investment-grade bond

a bond that is considered of the highest quality

bond rating

a category that tells an investor the risk assigned to a bond

debenture

a corporate bond backed by the general creditworthiness of the company

convertible bond

a corporate bond that can be exchanged for common stock

bond fund

a group of bonds that have been bundled together for investment purposes

revenue bond

a municipal bond issued to raise money for a public-works project. The revenues generated for the project are used to pay the interest and repay the bonds

tax-exempt

an investment is ______ when there is no tax due, either now or in the future

tax deferred

an investment is _______ when income is taxed at a later time

mortgage bond

another name for a secured bond

hedge

any investment or action that helps offset against loss from another investment or action

finances public works projects like airports and hospitals

A revenue bond is a type of municipal bond that...

false

Another name for a secured bond is a convertible bond. (T or F)

5

Corporations usually agree not to call bonds for the first ___ years after issuance.

true

The interest rate is the main factor that affects bond prices. (T or F)

When a bond sells for more than its face value, it is considered to be selling at a premium

Under what conditions can a bond sell at premium?

A callable bond is one that can be 'called back' or paid off before its maturity date. This is an attractive feature of the bond because if interest rates fall quickly, the issuer can call back their bond and re-issue them at a lower interest rate. It is a cost-effective option for corporations.

What is a callable bond? How does this feature make the bond more attractive to the investor?

A junk bond is a bond that has a low rating or no rating at all. Junk bonds have higher yields/high interest rates, yet they carry very high risks because the corporations they're coming from are not financially sound. The high interest rates/yields would make them appealing to a risk-taking investor.

What is a junk bond and why might an investor buy a junk bond?

One may choose a zero-coupon bond because of the chance of them earning a lot of money. They are sold at a deep discount - much cheaper than other bonds and the interest on them is not subject to taxation; however, zero-coupon bonds are very risky investments. They are considered the riskiest form of bond investments because you face the chance of losing a big sum of money if you sell the bond before maturity, you also receive no interest, and the prices on these bonds can fluctuate widely.

Why would investors choose a zero-coupon bond? Why is considered the riskiest form of investment?

sale of assets such as stock, bonds, or real estate

capital gains result from what?

A bond fund is a group of bonds that have been bundled together and sold in shares. It combines some investment-grade bonds along with some not as high-graded bonds. It is a method of hedging against risk.

explain how a bond fund lowers the risk of owning bonds.

bonds are rated based on the financial condition of the issuing corporation or municipality

how are bonds rated?

You can buy savings bonds from a full-service broker, or from a Federal Reserve System or online at 'Treasury Direct', can also purchase from your bank.

how can you buy a savings bond?

tax avoidance

legally reducing taxes by careful planning is called _____

1,000

most bonds require a minimum investment of $__________

face value

the amount the bondholder is paid at bond maturity

false

People who own bonds receive interest payments every month. (T or F)

Both are very safe investments which is a big advantage. Another advantage is that municipal bonds are exempt from federal taxes. Usually the interest rate is lower but it is a safer investment so that is the tradeoff.

what is a major advantage of buying government and municipal bonds?

Interest Rates have an effect on bond prices. When the interest rates rise, the value of bonds decrease and when interest rates drop, fixed-rate bonds will become for attractive.

what is the main factor that affects bond prices? Why?

registered bond

what type of bond is recorded in the owner's name by the issuing company?

bond default

when a bond issuer cannot meet the interest or principal payment on a bond

bond redemption

when the bond is paid off at maturity by the issuer

municipal

which type of bond interest is not subject to taxation?

tax shifting

to postpone taxes until the following year is called ________