Chapter 13: Investing in Bonds Flashcards Preview

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Flashcards in Chapter 13: Investing in Bonds Deck (49)
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1

Bonds:

long-term debt securities issued by government agencies or corporations that are collateralized by assets

2

Par value:

for a bond, its face value, or the amount returned to the investor at the maturity date when the bond is due

3

Debentures:

long-term debt securities issued by corporations that are secured only by the corporation’s promise to pay

4

Term to maturity:

the date at which a bond will expire and the par value of the bond, along with any remaining coupon payments, is to be paid back to the bondholder

Bonds maturities may vary between 1 and 30 years

5

background on bonds

Investors provide the issuers of bonds with funds
Issuers are obligated to make interest payments and to pay the par value at maturity
Coupon payments are normally paid semi-annually
Some bonds are issued at a price below par value

6

Call Feature

a feature on a bond that allows the issuer to repurchase the bond from the investor before maturity
-Offer a slightly higher return than similar bonds without a call feature

7

Sinking fund

a pool, of money that is set aside by a corporation or government to repurchase a set amount of bonds in a set period of time
-Acts like a mandatory call feature

8

Convertible bond:

: a bond that can be converted into a stated number of shares of the issuer’s stock at a specified price
-Tend to offer a lower return than non-convertible bonds

9

Extendible bond:

a short-term bond that allows the investor to extend the maturity date of the bond
-Tend to offer a lower return than non-extendible bonds

10

Put feature:

a feature on a bond that allows the investor to redeem the bond at its face value before it matures
-Slightly lower return than similar bonds without a put feature

11

Bond Characteristics

-call feature
- sinking fund
-convertible feature
-extendible feature
-put feature
-yield to maturity
-discount
-premium

12

Yield to maturity

the annualized return on a bond if it is held until maturity
-If a bond sells at par value, its yield to maturity equals the coupon rate

13

Discount:

a bond that is trading at a price below its par value
-If a bond sells below par value, its yield to maturity would exceed the coupon rate

14

Premium:

: a bond that is trading at a price above its par value
-If a bond sells above par value, its yield to maturity would be less than the coupon rate

15

Bonds Trading in the Secondary Market

-Investors can sell their bonds to other investors before the bonds reach maturity
-Bond prices change in response to interest rate movements and other factors
-Investors buy or sell bonds from a brokerage firm’ bond inventory

16

Term structure of interest rates:

: a graph that shows the relationship between bond yield to maturity and time to maturity
-Resulting curve is known as a yield curve
-Shape of the yield curve reflects the market’s sentiment about the direction for interest rates over time
-Yield curve shapes include normal, steep, inverted, and flat

17

Theories that attempt to explain why the term structure of interest rates is shaped the way that it is:

Liquidity preference theory

pure expectations theory

market segmentation theory

18

Liquidity preference theory

suggests that investors require a premium for investing in longer-term bonds

19


pure expectations theory

suggests that the shape of the yield curve is a reflection of the market’s expectation for future interest rate movements

20

market segmentation theory

suggests that the shape of the yield curve is determined by the supply and demand of bonds for various market players in different segments of the yield curve

21

Types of Bonds

Government of Canada Bonds
Federal Crown Corporation Bonds
Provincial Bonds
Municipal Bonds
corporate bonds

22

Government of Canada Bonds

debt securities issued by the Canadian government
-Not exposed to the risk of default by the issuer
-Issued with a term to maturity of between 1 and 30 years
-Interest is paid semi-annually
-
-Can be sold easily in the secondary market
-marketable bonds --> Government of Canada bonds that can be sold in a secondary market

23

Federal Crown Corporation Bonds

--debt securities issued by corporations established by the federal government
--Not exposed to the risk of default by the issuer
--Issued with a term to maturity of between 2 and 10 years
--Interest is paid semi-annually
--Can be sold easily in the secondary market

24

Provincial Bonds

-debt securities issued by the various provincial governments

-Risk of default by the issuer will differ depending on the province from which you purchased the bond
-Issued with a term to maturity of between 1 and 30 years
-Interest is paid semi-annually
-Can be sold easily in the secondary market

25

Municipal Bonds

---long-term debt securities issued by local government agencies

-Provide the funds necessary for municipal projects
-Very low default risk
-Uncommon investments in Canada
-Terms and condition will vary with the needs of the municipality

26

Corporate Bonds

long-term debt securities issued by large firms

-Subject to default risk
-High-yield bonds
-terms and condition will vary with the needs of the corporation

27

High-yield bonds:

bonds issue by less stable corporations that are subject to a higher degree of default risk

28

Other Fixed-Income Products

Short-Term -Debt Securities

-T-Bill's
-Banker's aceptances (BAs)-
- Commercial Paper
-

29

T-Bills:

short-term debt securities issued by the Canadian and provincial governments and sold at a discount

-Do not make coupon payments

30

Banker’s acceptances (BAs):

short-term debt securities issued by large firms that are guaranteed by a bank