Ch10: Debt Securities

Collateral trust bond:

a bond secured by a portfolio of securities

Accrued interest:

interest paid by the buyer of the bond to the seller of the bond for interest accrued between coupon dates

. A zero-coupon bond will have a duration equal to its

maturity

When rates are flat, are coupon bonds or convertible bonds going to be more volatile?

the convertible bond will be more volatile based on the underlying performance of the common stock

Parity:

when market value of the bond is the same as the market value of the shares received upon

conversion

In a period of falling interest rates, an issuer would be most likely to call a

high coupon bond without a call premium

In a period of falling interest rates, an issuer would be least likely to call a

a low coupon bond with a call premium

What can an issuer do if it wants to refinance its debt at current low rates, but the outstanding bonds are subject to a call protection period?

a pre-refund in which you issue new bonds at a lower percent, use those proceeds to repay the principals of the higher coupon bonds when the call protection period of those ends

ELNs are

unsecured debt instruments, has the credit risk of the issuer of the note, can trade on exchanges then called Exchange Traded Notes but illiquid, and return is based on the performance of a linked or underlying asset

The purpose of ELNs is to

avoid losses through downside protection

How are premium callable bonds quoted?

on a yield to call basis

How are discount callable bonds quoted?

On a yield-to-maturity basis.

What does a bond ETF typically do if one of its underlying bonds is called?

It will typically reinvest the proceeds in new bonds.

How does a buffered exchange‑traded note (ETN) work?

absorbs losses within within the buffer range are absorbed by the product while allowing full upside potenital, no cap like shark fin

ETNs are structured as

unsecured debt obligations of the issuing institution.

What are structured notes that derive value from the performance of an equity security called?

Equity‑linked securities or market‑linked securities.

Total return of any bond =

(interest received + capital gain) / original purchase price

Auto-callable yield notes are … that are suitable for …

structured products that are suitable for investors seeking a higher interest rate than the current yield associated with comparable debt instruments

Convertible bonds typically ,,, have compared with nonconvertible bonds?

Lower coupon rates.

What does the Trust Indenture Act of 1939 require for corporate bonds?

appointment of a trustee to protect bondholders.

How is interest from GNMA bonds taxed? (Ginnie Mae, or the Government National Mortgage Association)

GNMA bonds are usually taxed at the federal and state level.

U. S. Government debt is sold at auctions. T-Bills are offered at a … auction, T-notes are auctioned …, and T-bonds auctioned and …

T-Bills are offered at a weekly auction, T-notes are auctioned monthly, and T-bonds auctioned and issued by the Treasury department.

Are non-competitive bids are awarded before/after competitive bids?

non competitive are awareded before competitive bids

Yield ranking for discount bonds:

YTC > YTM > Current > Nominal “call for a discount”

Yield ranking for premium bonds:

Nominal > Current > YTM > YTC “nod at a premium”

Bond prices … as inflation increases.

fall

The only agency security backed by the full faith, credit and taxing power of the U.S. Government is a … The other instruments are not backed by the federal government.

GNMA Passthrough Certificate.

Many bonds issued by corporations are required to contain covenants, which are legal stipulations for the protection of investors. These covenants are usually found in the

indenture

The Trust Indenture Act of 1939 requires that issuers of various corporate bonds have an … in place, which contains many …

indenture, protective covenants

A banker’s acceptance is a

bank time draft instrument that helps facilitate the trading of foreign currencies for importers and exporters. 

The interest income generated by bonds issued by U.S. territories is…

exempt from all levels of taxation. 

When an investor buys an out-of-state municipal bond, they will generally be required to pay taxes on … and the interest will remain…

the interest they receive to their home state. The interest will remain exempt from federal income taxes. 

Yield spreads increase during periods of … and decrease during periods of ….

Yield spreads increase during periods of recession and decrease during periods of expansion.

When spreads are narrowing between bonds of different quality ratings, that means investors perceive … and that the economy is …

a higher risk of default in the market and that the economy is slowing down.

Floaters have interest rates that vary based on … which is usually a …

the performance of a benchmark rate, which is usually a T-bill or fed funds rate.

The rate spread between the interest paid by the floater and the benchmark rate is established

at issue and is not reset periodically.

An income bond, also known as an adjustment bond, is issued when .. and pay interest

a company is going through a reorganization and attempting to emerge from bankruptcy and pay interest only if the company has sufficient income to meet those payments (not assured)

… bonds would have the largest spread to US treasuries

High-yield or lower quality

A forced conversion occurs when

an issuer calls away bonds at a price lower than what the investors would receive if they converted it

Corp. & muni bonds

accrue using 30-day months & 360-day years; settle T+1

Govt bonds accrue in

actual days per month & 365 days per year; settle T+1

What does this say about the bond: A 6% J&D 15 Treasury bond is traded on Mon, Mar 2?

The coupon is 6%, so $60 annual coupon and $30 per coupon, paid on June and December, 15th of each month. It was traded on Monday, March 2nd and was last paid December 15th → Treasury so use actual days → Dec 15→31= 17 + Jan 31 + Feb 28 + Mar 2 = 78 days of accrued interest to the seller → 78 days x $30 coupon = 78/365 days = 21.4% of $60 = $12.84 + bond’s purchase price