Term
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Definition
| Bonds issued by the states and by local governments. |
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Definition
| The amount that the issuer agrees to pay the investor when the bond matures. |
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| When a bond is sold for less than its par value. |
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Definition
| When a bond is sold for more than its par value. |
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Definition
| When the bond mature sequentially from when they were issued. |
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Definition
| The issuer must agree to pay to investors interest until the bond matures; this a a fixed rate of interest. |
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| How to determine the Coupon Rate: |
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Definition
Interest Rate x Par value = Coupon Rate
10% x $1000 = $100
(Since bonds usually pay interest twice a year, the owner will receive two payments of $50) |
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Term
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Definition
| These bonds do not pay interest at regular intervals, but instead, an investor purchas it at a deep discount then redeems the bond for the full face value at maturity. |
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Term
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Definition
| This bond belongs to whomever is carrying it. Whenever an interest payment is due, the bondholder clips the coupon and takes it to the bank in order to receive the payment. No longer issued in the U.S. |
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Term
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Definition
| This bond has the owner's name on the bond and in the issuer's records. The issuer send teh principal and interest payments to the registered owner only. |
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Definition
| This bond does not receive any physical piece of paper. The issuer simply enters the owner's name and address on its records. |
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| When it reaches maturity, the bond holder will receive her bond's par value plus the last interest payment. |
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Term
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Definition
| A provision that gives the issuer the right to redeem bfore they mature. The investor receives the par value and the interest payments stop. |
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Definition
| A restriction on callable bonds on how soon the bonds can be called, typically 5 to 10 years from issue date. |
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Definition
| On callable bonds, the issuer has to pay the bondholders more than the par value of the bond in order to compensate tehm for redeeming the bonds early. |
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Term
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Definition
| Issuers deposit money into a fund eacy year in order to redeem their bonds; this fund helps to ensure the bonds will be paid off in an orderly fashion. |
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Term
Sylvestor Investor bought an 8% bond which matures in 10 years at 95.
How much did Sylvestor pay for this bond? |
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Definition
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Sylvestor Investor bought an 8% bond which matures in 10 years at 95.
Sylvester purchased this bond at a ___. |
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Definition
| Discount - it's selling for less than it's par value. |
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Term
Sylvestor Investor bought an 8% bond which matures in 10 years at 95.
How much will Sulvester receive when the bond matures? |
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Definition
Par value + Final Interest Payment
1000 + 40 = 1040 |
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Term
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Definition
| Same as the bond's coupon rate. |
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Term
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Definition
| Measures the annual interest that the investor receives from the bond compared to its current market price. |
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| How to calculate Current Yield: |
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Definition
Annual Interest/Market Prices = Current Yield
$100 inter./$800 price = 12.5% |
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Term
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Definition
| Everything an investor receives from the bond, includes: regular interest payments and par value. |
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Definition
1. Safer
2. More predictable |
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Definition
1. Doesn't offer same potential for capital appreciation.
2. Do not provide substantial protection against inflation. |
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Term
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Definition
| As interest rates rise, the prices of exisitng bonds will decline and vice versa; bond prices and interest rates have an inverse relationship. |
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Term
| Inflation (Purchasing-Power) Risk |
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Definition
| The risk that inflation diminishes the real value of a dollar by decreasing its purchasing power. |
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Term
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Definition
| The risk that the issuer may default- it may not be able to meet its obligations to pay interest to the bondholders. |
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| Moody's and Standard & Poor's |
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Definition
| Most prominent companies for evaluating an issuer and the likelihood that they may default, then issue a credit rating. |
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Term
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Definition
| Rating of Aaa to Baa or AAA to BBB; means they are suitable for most investors since their risk of default is low. |
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Term
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Definition
| Bonds rated Ba or BB or below; the lower the rating, the bigger the risk that the issuer will default. |
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Term
Which of the following is likely to decrease the most in price if interest rates rise?
a. A bond maturing in 2 years
b. A bond maturing in 15 years |
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Definition
| 15 year bonds; long-term bonds are more vulerable to interest-rate risk. |
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Term
Betsy Bondholder purchased an 8% Lemon County Bond at 80.
What is Betsy's nominal yield? |
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Definition
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Betsy Bondholder purchased an 8% Lemon County Bond at 80.
What is Betsy's current yield? |
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Definition
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Term
| Bonds that are ratted BB or below are called _____. |
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Definition
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| Sylvester Investor invested $100,000 in bonds. What will happen to the value of his portfolio if the rates increase? |
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Definition
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Term
| Historically, bonds have been used to provide investors with a hedge against inflation. True or False? |
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Definition
| False. (Equities are generally a good hedge against inflation) |
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Term
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Definition
| The total of all the various securities that the company has issued in order finance its operations. |
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Term
| Trust Indenture Act of 1939 |
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Definition
| Regulates corporate bond offerings; requires a trustee to be aapointed for the bondholders. The trustee is usually a bank or trust company, and its job is to represent the bondholders' interests. |
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Term
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Definition
| Document that would constitute the contract between the trustee (usually a bank) and the bond holders. It would spell out all of the issuers responsibilities to the bondholders. |
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Term
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Definition
| Bonds that are backed by particular assets that the corporation owns. |
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Term
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Definition
| Bonds that are secured by a first or second mortgage on real property (either land or buildings). The bondholders have a lien on the property. |
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Term
| Equipment Trust Certificates |
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Definition
| Bonds that are secured by a piece of equipment; usually issed by transportation companies. |
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Term
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Definition
| Bonds that are secured by the stock or bonds of another company; usually the other corporation is an affiliate or a subsidiary of the issuing corporation. |
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Term
| Unsecured Bonds/ Debentures |
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Definition
| Bonds that are secured only by the company's promise to pay (good faith); not by a specific piece of corporate property. If the issuer defaults, the owners have teh same claim on the company's assets as any other genral creditor. |
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Term
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Definition
| Unsecured bonds that have a junior claim to their assets. |
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Term
| Bondholders Liquidation Rights: |
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Definition
1. Secured Bondholders
2. Unsecured Bondholders
3. Subordinate Debentures |
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Term
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Definition
| Bonds that allow their investors to convert their bonds into shares of the company's stock at a predetermined ratio. Offer greater degree of safety than stock, but also offer greater capital appreciation than noncovertible bonds. |
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Term
Converting Bonds to Stocks:
Conversion Ratio |
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Definition
Par Value of Bond/ Conversion Price = Conversion Ratio
$1000 par value/$40 Conver. price = 25 shares for each bond |
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Term
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Definition
| If the bondholder sells their bond before they receive the next interest payment, they are still entitled to the interest earned up until they sold the bond. |
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Term
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Definition
| It is taxed as ordinary income. |
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Term
Debentures are:
a)Unsecured corporate bonds
b)Municipal Bonds
c)Mortgage Bonds
d)High-yield Bonds |
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Definition
| a) Unsecured Corporate Bond |
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Term
| Convertible bonds can be converted into _____. |
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Definition
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Term
| A company's capitalization represents: |
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Definition
| All the sources of long-term financing. |
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Term
| Betsy Bondholder bought a subordinated debenture selling at 93 5/8. How much did she pay for this bond? |
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Definition
93 5/8
5/8= .625
93.625 -> .93625
.93625 x $1000 = $936.25 |
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Term
| Advantages of U.S. government/treasury securities: |
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Definition
-Highly liquid
-Interest is tax exempt from state and local income taxes
-Safe |
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Term
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Definition
| Pay fixed rate of interest semiannually and the investor receives the face value of the security when it matures; sold in denominations of $1000. Mature in 2 to 10 years. |
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Term
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Definition
| Pay fixed rate of interest semiannually and the investor receives the face value of the security when it matures; sold in denominations of $1000. Can take as long as 30 years to matures. |
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Term
| Treasury Inflation-Protected Securities (TIPS) |
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Definition
| The principal value of these securities is inflation adjusted based on the Consumer Price Index; rate of interest is fixed, but principal amount may vary. |
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Term
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Definition
| Short-term securities that mature in one year or less; sold in denominations of $1000. Do not make interest payments to investors; discount securities and non-interest bearing. |
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Term
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Definition
| Zero-coupon bonds issued by the U.S. goverment; investor does not receive any periodic interest payments, but a lump sum when the bond matures. |
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Term
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Definition
| 30-year investments issued in denominations ranging from $50 to $1000; are purchased at a 50% discount from face value. |
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Term
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Definition
| 20-year investments with the face values ranging from $500 to $1000; Pay interest to investors semiannually. |
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Term
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Definition
| Savings bonds that are indexed for inflation and sold at face value; pay interest for up to 30 years. |
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Term
| Government National Mortgage Association (GNMA or Ginnie Mae) |
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Definition
| A goverment-owned corporation that guarantees securiites backed by a pool of mortages insured by the Federal Housing Administration or guaranteed by the Veteran's Adminstration or the Farmers Home Adminstration. The securities are direct obligations of the U.S. government. |
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Term
| Federal National Mortgage Association (FNMA or Fannie Mae) |
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Definition
| Was origninally incorporated as a government-owned corporation, but is now a private company. It buys mortgages from lenders, packages them, and resells the resulting mortgage-backed securities to investors. |
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Term
| Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) |
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Definition
| Purchases residential, Federal Housing Administration, and Veteran's Administration mortgages from savings institutions and resells them by means of mortgage-backed securities; not guaranteed by the U.S. government. |
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Term
| Pass-Through Certificates |
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Definition
| Most common type of mortgage-backed security; created by an agency that purchases a group of mortgages and pools them together. The agencies sell interests in this pool to investors. Each certificate entitles its owner to a share in the cash generated by the pool of mortgages. |
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Term
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Definition
| Similar to call risk; occurs if homeowners pay off their mortgages early causing the cash flow from a pass-through certificate to be unpredicatable. |
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Term
| Collateralized Mortgage Obligations (CMOs) |
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Definition
| Issued by Freddie Mac and private companies and are backed by pools of mortgages, mortgage pass-throughs. They divide the principal and interest paymetns from the underlying mortgages into various classes of bonds (tranches). |
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Term
Which of the following types of securities is nonnegotiable?
a)HH bonds
b)T-bills
c)GNMA pass-through certificates
d)T-bonds |
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Definition
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Term
Which of the following would you recommend to investors who need monthly income?
a)Treasury STRIPS
b)GNMA pass-through certificates
c)Treasury Notes
d)Common Stocks |
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Definition
| b) GNMA pass-through certificates |
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Term
| Characteristics of a T-Bill: |
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Definition
-Mature in 3 months, 6 months, and 1 year.
-Sold at a discount from face value.
-Investors do not pay state or local taxes on interest.
-They are direct obligations of the U.S. Treasury. |
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Term
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Definition
| Used to by state and local governments to rais money; interest is exempt from federal government, so beneficial for investors in higher tax brackets. |
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Term
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Definition
| Used to calculate earnings on tax exempt vs. taxable investments. |
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Term
| How to calculate Tax-Equlivalent Yield: |
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Definition
Tax-Equ. Yield = Municipal Yield/
(100% - Tax bracket) |
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Term
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Definition
| Income once taxes are paid. |
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Term
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Definition
| Bonds secured by full faith and credit of the issuer (the municipality's ability to collect taxes). |
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Term
| How to calculate Net Yield: |
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Definition
| Net Yield= Taxable Yield x (100% - Tax Bracket) |
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Term
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Definition
| Property taxes based on the value of the real estate that the taxpayer owns. |
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Term
| Limited-Tax General Obligation Bonds |
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Definition
| Bonds issued by certain governmental units, like school districts, which have a legal limit on the amount of taxes that they may impose. |
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Term
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Definition
| These bonds are backed by the fees that people pay to use a specific facility like a toll bridge; commonly used to finance certain projects. |
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Term
| Industrial Development Revenue Bonds (Industrial Development Bonds) |
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Definition
| A special type of revenue bond; are issued by a municipality but backed by a private corporation. Money raised is used to pay for the construction of a building or plant that the municipality leases to the corporation. |
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Term
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Definition
| Used for state and local governments when they need to raise money on a short-term basis; mature in one year or less. |
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Term
| Types of Municipal Notes: |
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Definition
1) Bond Anticipation Notes (BANs)
2) Tax Anticipation Notes (TANs)
3) Revenue Anticipation Notes (RANs) |
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Term
| Bond Anticipation Notes (BANs) |
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Definition
| Issued to obtain temporary financing when the municipality expects to issue long-term bonds. |
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Term
| Tax Anticipation Notes (TANs) |
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Definition
| Used when the municipality expects to repay the notes through the collection of taxes. |
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Term
| Revenue Anticipation Notes (RANs) |
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Definition
| Used whent he issuer expects funds from some other source than its own taxes, such as revenue from the state or federal government. |
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Term
| Yogi lives in Montana and is in the 28% tax bracket. He is considering buying an 8% Montana state bond; what would his tax equivalent yield be? |
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Definition
= Municipal yield/ (100%-tax bracket)
= 8%/(100%-28%)
=11.1% |
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| Yogi lives in Montana and is in the 28% tax bracket. What would his net yield be if he invested in a fully-taxable 10% corporate bond? |
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Definition
Net Yield = 10% x (100%- 28%)
=7.2% |
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| The Montana State Transit Authority just issued new bonds to build a new toll road. The tolls pay will finance the debt service. This is an example of: |
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Definition
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| Molly lives is in a high tax bracket and lives in California. She wants to invest, but not increase her tax liablity. What would you recommend? |
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Definition
| GO bonds, the interst would most likely be exempt from federal, state, and local income taxes. |
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