Unit 3 - Debt Securities

A company issues a bond. What does this mean for the investor?

The investor is lending money to the issuer and is owed interest + principal.

A bond has a par value of $1,000. What does this represent?

The amount repaid at maturity.

A corporate bond calculates accrued interest using 30/360. What does this mean?

30

A Treasury bond calculates accrued interest using actual/actual. What does this mean?

Actual days in the month and year.

Interest rates rise sharply. Which bonds fall the most in price?

Long

A company issues term bonds. What does this mean?

All bonds mature at the same time.

A company issues serial bonds. What does this mean?

Bonds mature in stages over time.

A callable bond is issued. What risk does the investor face?

Call risk — issuer may redeem early when rates fall.

A convertible bond is issued. Why is the coupon lower?

Investors accept a lower coupon because they can convert into stock.

A bond has a 5% coupon and sells for $900. What is true about its yields?

Discount: coupon < CY < YTM < YTC.

A bond sells at par. What is true about its yields?

Coupon = CY = YTM = YTC.

A bond sells at a premium. What is true about its yields?

Premium: coupon > CY > YTM > YTC.

A corporate bond investor wants to know after

tax yield. How is it calculated?

A bond’s price rises by 1 point. How much is that?

$10 per bond (1% of $1,000).

A company issues a debenture. What backs it?

Only the issuer’s creditworthiness (unsecured).

A subordinated debenture is issued. What does this mean?

Lower priority than debentures → higher yield.

A guaranteed bond is issued. What backs it?

Another company guarantees payment.

An income bond is issued. When does it pay interest?

Only if the company has sufficient earnings.

A T

bill is issued. What is unique about it?

A T

note is issued. What is unique about it?

A T

bond is issued. What is unique about it?

A broker

dealer creates Treasury Receipts. What are they?

The U.S. Treasury issues STRIPS. What are they?

Official Treasury zero

An investor wants inflation protection. Which Treasury security fits?

TIPS — principal adjusts for inflation.

A GNMA (Ginnie Mae) bond is issued. What backs it?

Full faith and credit of the U.S. government.

A Fannie Mae bond is issued. What backs it?

A government

A Freddie Mac bond is issued. What backs it?

A government

A municipal GO bond is issued. What backs it?

Full taxing power of the municipality; requires voter approval.

A municipal revenue bond is issued. What backs it?

Revenue from a specific project; no voter approval required.

A city issues a TAN. What is it?

Tax anticipation note — short

A corporation issues commercial paper. What is true?

Unsecured, ≤270 days, issued by strong credit companies.

A bank issues a negotiable CD. What is true?

Large denomination, tradeable, short

A money market fund tries to maintain a $1 NAV. Why?

For safety and liquidity.