Textbook Chap 4 (SIE)

Zero coupon bonds are purchased at a __________ and mature at _________.

discount, par value

If a bond matures on June 1, on what two dates will the bond pay interest?

Every June 1 and December 1 (when given the maturity date, the next payment is six months later)

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

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

When an issuer performs a partial call, how does it choose which bond to call?

The Reorganization Department must use an impartial lottery to select bond

The formula for finding conversion ratio is: ________ / ________

Par / Conversion Price (par for a bond is $1,000)

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

speculative or junk

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

serial bond

When interest rates go down, bond prices go ___.

up

Define debt service.

The total of all interest and principal payments for a bond offering.

An investor who sells a bond between its coupon payments is entitled to _______ interest for the time he owned the bond.

accrued

Corporate and municipal bonds are quoted in 8ths, whole T-Notes and T-bonds are quoted in ______.

32nds

Credit risk measures the issuer’s risk of _______.

default on debt service

If a bond’s price has risen from 98 to 108, what has likely happened to interest rates?

Rates have probably fallen, which has caused the increase in the bond’s price

The formula for finding a bond’s semi-annual interest payment is (___ x ______________) / ___

Par x Coupon (Interest) Rate / 2

True or False: And issuer will perform a lottery for a full call

False. Lotteries are only necessary for partial calls

What does a put feature on a bond allow?

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

Who issues debt?

Corporations, municipalities, the US government and its agencies

A corporation that issues convertible bonds is borrowing money at a _____ rate

lower

True or False: Interest-rate risk is the risk that changing interest rates will negatively impact the price of a bond

True

A ____ call is a situation where an issuer redeems an entire bond issue before maturity

full

What is the highest credit rating?

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

Name some of the advantages of buying convertible bonds

Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond)

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

If a bond’s first coupon payment is more than six months after its issuance, it’s referred to as a ______ coupon

long

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

par

_______ are considered creditors of a company

Bondholders

If a bond matures on November 15, on what two dates will the bond pay interest?

Every November 15 and May 15 (when given the maturity date, the next payment is six months later)

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

call premium

What is the advantage for a corporation that issues convertible bonds?

It is able to pay a lower rate of interest (ie a lower coupon)

Issuers of bonds may be referred to as _____.

debtors

True or False: Investors buy zero-coupon bonds for income.

False. Since zero-coupon bonds don’t have semi annual payments, they are not suitable for income investors

$______ is the par value of bonds

1,000

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

term

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

true

True or False: Corporate and municipal bonds prices are quoted in 32nds

False. Corporate and municipal bonds prices are quoted in 8th, while Treasuries are quoted in 32nds

Bondholders are also referred to as _____.

creditors

Bond interest is stated ______ and paid ______.

annually, semi-annually

What types of debt instruments have the least amount of credit risk?

US Treasuries

Describe call protection

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

For a bond, what does a call feature allow?

It allows the issuer to buy (call) the bond back from the bondholders prior to maturity

If a bond’s price has fallen from 98 to 91, what has likely happened to interest rates?

Rates have probably risen, which has caused the decline in the bond’s price

The formula for finding a bond’s annual interest payment is: ___ x ____________

Par x Coupon

When interest rates go up, bond prices go ______.

down

If a bond’s first coupon payment is less than six months after its issuance, it’s referred to as a ____ coupon

short

List the three bond yields

Nominal, Current, and Yield-to-Maturity

Calculate the price of a corporate bond quoted at 98 ¾

Convert the fraction to a decimal: ¾ = .75 and then multiply $1,000 by 98.75% = $987.50

Calculate the price of a Treasury bond that is quoted at 98 16/32

Turn the fraction in to a decimal: 16/32 = .50, add $1,000×98.50% = $985

What is credit risk?

Credit (default) risk is the risk that a company will be unable to pay interest or principal on it’s bonds

What is forced conversion?

An issuer calls bonds at a point where the stock worth more than the bond’s call price

Is the conversion of a bond a taxable event?

No, it is a tax-free exchange. The taxable event would occur when the stock is sold

If a AA rated bond is downgraded by two notches, what is its new rating?

A+

TorF: Short term bonds typically have higher coupon (interest) payments

False . Long term bonds typically pay more interest since investors assume greater default risk

A bond trading at a price above par is a ______ bond

premium

Describe the dated date

The date on which a newly issued bond’s interest begins to accrue

A bond trading at a price below par is a ________ bond

discount

If a bond is referred to as a trading flat, this means it trades _________.

without accrued interest

TorF: An issuer must call all of its bonds at the same time

False. Issuers may call only part of a bond issue back. This is called a partial call.

Bonds rated ______ and higher are considered investment grade

BBB (for S&P) or Baa ( for Moody’s)

_____ and _____ are the two types of bond redemptions

maturity, calls

Jim owns a 5% bond maturing on 6/1/2022. What would Jim receive at maturity if the bond pays interest semi-annually?

$1025, which represents the $1000 principal value plus the final coupon payment of $25