Unit 13: Types and Characteristics of Fixed Income (Debt) Securities and Methods Used to Determine Their Value
High-yield bonds
Another name for junk bonds, or lower grade bonds
Bond prices rise
As interest rates fall,
Bond prices fall
As interest rates rise,
above
Convertible securities generally sell at a price somewhat _______ the parity price
above $1,200.
DERP Corporation has issued 5% convertible debentures maturing in 2040. The conversion price is $40 and the common is currently trading at $48 per share. One would expect the DERP debentures to be selling somewhat
1/32 of $10, or $.3125
For government bonds, each .01 represents
$1000
Par or Face Value of a bond is always
7 years
A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio?
longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon
A bond's duration is
4.5% because the TIPS get the PRINCIPAL adjusted, not the coupon rate.
A client has a TIPS with a coupon rate of 4.5%. The inflation rate has been 7% for the last year. What is the inflation-adjusted return?
TIPS
A customer wishes to buy a security providing periodic interest payments, safety of principal, and protection from purchasing power risk. What should the customer purchase?
Duration
A measurement of the time it takes for the cash flow (interest payments) to repay the invested principal
the present value of future cash flows to determine an appropriate current value.
A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate
1/8 of $10, or $1.25
For corporate and municipal bonds, the fractions represent
less
For coupon bonds, duration is always ____ than the bond's maturity
equal
For zero coupon bonds, duration is always ___ to the bond's maturity
below par
If a customer buys a 6% bond maturing in 8 years on a 7.33 basis, the price of the bond is
federal tax, but exempt from state and local income taxes
Interest payments from TIPS and increases in the principal of TIPS are subject to
Bonds and debentures
Long term borrowing is usually in the form of
A minimum of five years, although more frequently the length of time is 20-30 years
Long-term debt financing is money borrowed for
Cash equivalents, such as commercial paper and T-bills
Short-term financing is usually in the form of
$36 per share
The XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock?
Lower
The coupon rate will invariably be ___ than for non-convertibles of the same quality
Indenture
The terms of the loan are expressed in a document known as the bond's
Bonds rated in the top 4 categories
What bonds are investment-grade bonds?
Pays $30 every 6 months.
What does 6% semiannually bond mean?
it's current yield increases
What happens to a bond's current yield when it trades at a discount?
decrease, increases
What happens to bond durations when coupon rates increase and maturities increase? As coupon rates increase, duration: As maturities increase, duration:
It's shorter
What happens to the duration of a bond with a higher coupon rate?
Yield to maturity
Which of the following factors has an inverse relationship to a bond's duration?
$100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity
Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return?
