Bonds

What is the yield order for Premium bonds? (highest to lowest)

Nominal Yield → Current Yield → YTM → YTC

What is the yield order for Discount bonds? (highest to lowest)

YTC → YTM → Current Yield → Nominal Yield

When a bond is trading at a discount, it’s ________ is greater than it’s _____

current yield, coupon (nominal yield)

When a bond is trading at a premium, it’s ________ is greater than it’s _____

coupon, current yield

What is Yield to Call?

the rate of return that a bond would provide if the investor held it to a call date as opposed to maturity.

The _____ will be higher than the ____ for a bond trading at a discount.

YTC, YTM

The ____ will be lower than the ____ for a bond trading at a premium.

YTC, YTM

The YTW for a bond trading at a discount will be the ____.

YTM

The YTW for a bond trading at a premium will be the ____

YTC

Once a bond is issued and starts to trade in the market, ______ and _____ don't change

the coupon rate, par value

Bond prices fluctuate due to what?

Interest rate changes

When interest rates ____, callable bonds are likely to be called.

Fall

When interest rates ____, puttable bonds are likely to be redeemed.

Rise

What is the S&P ranking for investment grade bonds? (highest to lowest)

AAA

AA

A

BBB

What is the Moody’s ranking for investment grade bonds? (highest to lowest)

Aaa

Aa

A

Baa

What is the S&P ranking for speculative grade bonds? (highest to lowest)

BB

B

CCC

CC

C

What is the Moody’s ranking for speculative grade bonds? (highest to lowest)

Ba

B

Caa

Ca

C

Bonds with long-term maturities or low coupon rates, and those sold at a deep discount, are most susceptible to _____

interest rate risk.

What is the “3M” rule in bonds?

Maturity Magnifies Move. Longer maturity bonds are impacted more heavily by price changes.

_______ term-maturity bonds are more volatile.

Long

________ term-maturity bonds are less volatile.

Short

______-coupon (______) bonds are more volatile.

Low, discount

______-coupon (______) bonds are less volatile. 

High, premium

What is the conversion ratio formula?

Conversion Ratio = Par value of bond / Conversion price

What is the bond parity price formula?

Parity price of bond= conversion ratio x stocks market price

What is the stock parity formula?

Parity price of stock = Bond market value / conversion ratio

What is Arbitrage?

when a trader buys the lower priced security and simultaneously sells the equivalent higher priced security to lock in a profit.

What is a debenture?

the written contract between issuer and bondholder.

How is a debenture listed?

Under an indenture per the Trust Indenture act of 1939

What is the maturity for T-Bills?

One year or less

What is the maturity for T-Notes?

2 to 10 years

What is the maturity for T-Bonds?

10 to 30 years

When is interest paid for T-Bills?

None, they are sold at a discount.

When is interest paid for T-Notes?

Semiannually

When is interest paid for T-Bonds?

Semiannually

How are T-Bills taxed?

Taxed by Fed, exempt from state & local

How are municipal securities taxed?

Exempt from Fed, subject to state and local

How are mortgage-backed securities taxed?

Fed, State and local

For municipal securities, what document is required by the confirmation of the trade?

an Official Statement

What is a debt limit?

a limit on the dollar amount of bonds sold by a municipality

What is a GO Bond (general obligation bond)?

a bond that is backed by the full faith, credit, and taxing power of the issuer. Typically backed by tax revenue.

What are limited tax bonds?

Bonds where the municipality is required to collect enough taxes to service the debt

What are Capital Appreciation Bonds (CABs)?

Municipal zero coupon bonds, sold at a deep discount to par. Only the discounted principal is counted against the issuers debt limit.

What are GO Bonds backed by?

Ad valorem taxes & municipality credit/faith

What are revenue bonds backed by?

The specific project they’re involved with (ex: sports arena revenue)

What is a GO bond issued for?

To fund a municipality’s budget

What is a revenue bond issued for?

To fund a specific project

What is a trust indenture?

A series of promises made by the issuer of a debt security. Typically requires the issuer to make semi-annual interest payments to bondholders, and to file reports with the SEC (for corp. bonds)

What are Special Tax Bonds?

Issues secured by a tax other than an ad valorem tax. Typically excise tax such as cigarette, liquor and gasoline. The tax source does not have to be related to the project.

What are Special Assessment Bonds?

Used to fund improvements not for the general public (ex: new sidewalk for a particular neighborhood.) Increased taxes in the area typically back these.

What are Moral Obligation Bonds?

Backed by a promise to pay, but not an obligation. (Typically issued in times of need and incur a higher level of risk)

What is a double-barreled bond?

backed by a revenue source other than ad valorem taxes, but are also backed by a municipal issuer. (Ex: highway rev bond backed by toll revenue, but also municipal taxing power)

What is a parity bond?

How/where are municipals traded?

OTC (Over the Counter)

When is a muni bond triple tax free?

When the investor resides in the state of issuance

When are muni bonds always triple tax free?

Puerto Rico, Guam, Virgin Islands

What is “Current Yield”?

the rate an investor earns if they purchase a bond and hold it for a year

How are corporate bonds quoted?

Percentage of par in 1/8ths (Ex: 105 5/8 = 105.625% of par = $1,056.25 per bond)

What is the dollar value of a bond point?

$10

The ______ the maturity, the _______ the change in price for a given change in interest rates

longer, greater

The ______ the coupon, the _______ the change in price for a given change in interest rates

lower, greater

What is reinvestment risk?

The risk that interest rates will drop and interest payments received over the life of the bond will be reinvested at lower rates.