SIE (Training Consultants v3.5, 2025): Ch. 2 Debt Securities, Sec. 1 - Intro to Bonds

Bonds

Loans made to organizations that represent debt obligations, not ownership interest.

Bond Par Value

$1,000, the principal amount of a bond.

Coupon Rate

The fixed interest rate paid on a bond, expressed as a % of par value.

Bond Interest Payments

Paid semi-annually (twice a year).

Corporate Bond Quotation

Quoted in points, where 1 point = $10. Example: 98½ = $985.

Maturity Date

The date the bond principal is repaid to the investor.

Bond at Discount

Bond trades below par value (< $1,000).

Bond at Par

Bond trades at exactly par value ($1,000).

Bond at Premium

Bond trades above par value (> $1,000).

Series Bonds

Bonds with different issue dates but the same maturity date.

Term Bonds

Entire issue of bonds that mature on the same date.

Sinking Fund

Money set aside to redeem bonds, adds safety but lowers yield.

Serial Bonds

Bonds with one issue date and staggered maturities at regular intervals.

Balloon Maturity

A large portion of a bond issue comes due near the final maturity date.

Funded Debt

Corporate debt due more than one year from issue date; includes bonds, notes, and bank loans.

Registered Bonds

Bonds registered in the investor’s name; interest and principal sent directly to owner.

Bearer Bonds

Bonds not registered; interest collected by clipping coupons. No longer issued.

Registered as to Principal Only

Registered for principal but coupons must be clipped for interest. No longer issued.

Book-Entry Bonds

Bonds recorded electronically; most bonds today are issued this way.

Standard & Poor’s AAA Rating

Highest grade bonds.

Standard & Poor’s BBB Rating

Medium grade bonds.

Standard & Poor’s BB Rating

Speculative grade bonds.

Standard & Poor’s D Rating

Default with little chance of recovery.

Moody’s Aaa Rating

Best quality bonds.

Moody’s Baa Rating

Lower medium grade bonds.

Moody’s Ba Rating

Speculative elements.

Moody’s C Rating

Poor standing, often in default.

Bond Ratings Purpose

To indicate credit quality and risk of default.

Three Categories of Bonds

Corporate, Government, Municipal.

Corporate Bonds

Issued by public corporations; highest risk and highest coupons.

Government Bonds

Issued by federal government; safest, lowest yields.

Municipal Bonds

Issued by state/local governments; moderate risk and tax advantages.

Corporate Bond Taxation

Interest taxable at federal, state, and local levels.

Government Bond Taxation

Interest taxable at federal level, exempt at state/local levels.

Municipal Bond Taxation

Interest usually exempt at federal level, taxable at state/local.

Corporate Bond SEC Registration

Subject to SEC registration.

Government Bond SEC Registration

Not subject to SEC registration.

Municipal Bond SEC Registration

Not subject to SEC registration.

Corporate Bond Quotation

In dollars and 1/8ths.

Government Bond Quotation

In dollars and 1/32nds, as % of par.

Municipal Bond Quotation

In dollars in 1/8ths, % of par, or yield to maturity.

Accrued Interest Corporate & Municipal

Based on 30-day month/360-day year.

Accrued Interest Government

Based on actual calendar days (365 days).

Coupon Rate

Fixed % of par value paid in interest.

Bond Yield

Actual return an investor receives, accounting for purchase price, interest, and redemption.

Bond Purchased at Discount

Yield > Coupon Rate.

Bond Purchased at Par

Yield = Coupon Rate.

Bond Purchased at Premium

Yield < Coupon Rate.

What does buying a bond represent?

Lending money to an organization as a creditor.

What is the par value of a bond?

$1,000.

How often is bond interest paid?

Semi-annually.

What does an 8% coupon rate pay annually?

$80 in interest ($40 twice per year).

How are corporate bonds quoted?

In points, where 1 point = $10.

What happens at a bond’s maturity date?

Principal ($1,000) is repaid to the investor.

What does it mean if a bond trades at a discount?

Its price is below par (< $1,000).

What does it mean if a bond trades at a premium?

Its price is above par (> $1,000).

Which bonds have different issue dates but the same maturity date?

Series Bonds.

Which bonds all mature on the same date?

Term Bonds.

What is a sinking fund?

Money set aside to redeem bonds, adding safety.

Which bonds have staggered maturity dates?

Serial Bonds.

What is a balloon maturity?

Large portion of issue matures near the final maturity date.

What is funded debt?

Corporate debt due more than one year from issue.

What are registered bonds?

Bonds in investor’s name with direct payments.

What are bearer bonds?

Unregistered bonds with coupons that must be clipped.

What are book-entry bonds?

Bonds held electronically.

Who are the major bond rating agencies?

S&P, Moody’s, Fitch.

What is the highest S&P rating?

AAA.

What is the lowest Moody’s rating?

C.

What does a plus or minus sign mean in S&P ratings?

High or low relative standing within a category.

What are the three categories of bonds?

Corporate, Government, Municipal.

Which type of bond is riskiest?

Corporate.

Which type of bond is safest?

Government.

Which type of bond usually offers tax advantages?

Municipal.

How are corporate bonds taxed?

Interest taxable at federal, state, and local levels.

How are government bonds taxed?

Taxable at federal level, exempt at state/local.

How are municipal bonds taxed?

Usually exempt at federal, but taxable at state/local.

What is the coupon rate of a bond?

Fixed % of par paid as interest.

What is the yield of a bond?

Actual return received based on price and payments.

If a bond is purchased at discount, which is higher: yield or coupon?

Yield.

If a bond is purchased at premium, which is higher: yield or coupon?

Coupon.