Series 7 Chp 5

A type of maturity where all bonds mature on one specific date is called a _______ bond.

A type of maturity where all bonds mature on one specific date is called a term bond.

A bond trading at a price below par is a __________ bond.

A bond trading at a price below par is a discount bond.

What is the formula for calculating a bond's current yield?

Annual Interest ÷ Current Market Price

What is the maturity type where a portion of principal is retired each year?

Serial bond

Are prerefunded bonds quoted on a yield-to-maturity (YTM) or yield-to-call (YTC) basis?

YTC

When executing a pre-refunding, into what account would the new issue proceeds be placed?

An escrow account managed by a trustee.

True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.

False. There is an inverse relationship between interest rates and prices.

True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.

True

What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.

$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)

The process of adjusting the basis of a premium bond down to par over its life is called _______________.

The process of adjusting the basis of a premium bond down to par over its life is called amortization.

What are two synonymous terms for a bond’s interest rate?

Coupon rate and nominal yield

What is the highest credit rating?

AAA for S&P and Fitch, and Aaa for Moody’s

What is the impact on bonds that have been prerefunded?

Credit is improved and the issue is considered defeased for the issuer.

What does yield-to-maturity (YTM) take into account that current yield does not?

Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money

Refunding would most likely occur when interest rates have _________.

Refunding would most likely occur when interest rates have fallen.

A bond with an 8% coupon would pay how much interest per year?

$80.00. Par x Rate ($1,000 x 8%)

Describe call protection.

The number of years after issuance during which bonds may not be called by the issuer

Rank in order, from highest to lowest, the three yields on a bond priced at a discount.

YTM, Current Yield, Nominal Yield

A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?

YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.

True or False: Interest paid on corporate bonds is entirely tax-exempt.

False. Corporate bond interest is taxed at the federal, state, and local level.

Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.

Accrued interest on municipal bonds is calculated using 30 days in the month and 360 days in the year

What yield would be disclosed for a bond purchased at a discount?

Yield to maturity (YTM)

What is level debt service?

Each year’s debt service payments remaining generally equal.

When discussing a bond, the YTM may also be referred to as _______.

When discussing a bond, the YTM may also be referred to as basis.

$______ is the par value for bonds.

$1,000 is the par value for bonds

Bond interest is stated ___________ and paid ________________.

Bond interest is stated annually and paid semi-annually.

Into what does an issuer periodically set aside money for retiring debt?

Into what does an issuer periodically set aside money for retiring debt?

How does S&P and Moody’s further differentiate their ratings?

S&P uses + or - , while Moody’s uses 1, 2, 3.

What yield would be disclosed for a bond purchased at a premium and callable at a premium?

The lower of the YTM or YTC

The __________________ represents the amount above par that issuers pay to redeem bonds early.

The call premium represents the amount above par that issuers pay to redeem bonds early.

Calculate the price of a corporate bond quoted at 98 ¾.

Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.

Rank in order, from highest to lowest, the three yields on a bond priced at a premium.

Nominal Yield, Current Yield, YTM

What does a put feature on a bond allow?

Bondholders may put (redeem) the bond back to the issuer prior to maturity.

Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.

Accrued interest on corporate bonds is calculated using 30 days in the month and 360 days in the year.

What is the IRS method for accreting the basis of a bond?

Constant yield or constant interest method

True or False: Investors may exercise a bond's call privilege any time after issuance.

False. Only issuers may exercise the call privilege after the call protection period has passed.

How is interest on corporate bonds treated for tax purposes?

Fully taxable (taxed at the federal, state, and local level)

What yield would be disclosed for a bond purchased at a premium and callable at par?

Yield to call (YTC)

What is the original issue that is being refunded called?

Prerefunded bonds

May bonds be called early due to an event which destroys the source of revenue backing the bond?

Yes, when using a catastrophe call

What yield would always be disclosed for a bond that has been prerefunded?

YTC

____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.

Refunding refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.

The money held in escrow from a pre-refunding is invested in _________________________.

The money held in escrow from a pre-refunding is invested in U.S. Government securities.

Are serial or term bonds more likely to have a sinking fund?

Term bonds are more likely to have a sinking fund.

Debt service represents the total of all ____________ and ____________ payments.

Debt service represents the total of all principal and interest payments.

A bond trading at a price of $1,000 is a ______ bond.

A bond trading at a price of $1,000 is a par bond.

Bonds rated BB (Ba) or lower are considered _______________________ bonds.

Bonds rated BB (Ba) or lower are considered speculative or junk bonds.

What does one basis point represent as a percentage?

0.01%

Accrued interest on T-Notes and T-Bonds is calculated using ______ days in the month and _____ days in the year.

Accrued interest on T-Notes and T-Bonds is calculated using actual days in the month and 365 days in the year.

A bond trading at a price above par is a ____________ bond.

A bond trading at a price above par is a premium bond.

Bonds rated ___________ and higher are considered investment grade.

Bonds rated BBB (for S&P and Fitch) or Baa (for Moody's) and higher are considered investment grade.

Bondholders are also referred to as ____________.

Bondholders are also referred to as creditors.