Chapter 6: bond valuation and interest rates part 1 Flashcards Preview

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Flashcards in Chapter 6: bond valuation and interest rates part 1 Deck (27)
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1
Q

what can bonds be

A
  1. bearer bonds or

2. registered bonds

2
Q

what is a bearer bond

A

is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered – no records are kept of the owner, or the transactions involving ownership.

3
Q

What is a registered bond

A

A bond whose owner is registered with the bond’s issuer. The owner’s name and contact information is recorded and kept on file with the company, allowing it to pay the bond’s coupon payment to the appropriate person.

4
Q

what are the characteristics of bonds

A
  1. a fixed face value or par value
  2. a fixed coupon
  3. a fixed maturity date
5
Q

what is a fixed face value or par value

A

paid to the holder at maturity

6
Q

what is a fixed coupon

A

specifies the interest payable over the life of the bond

7
Q

how are fixe income securities often classified

A

according to maturity

8
Q

what are some fixed income securities

A
  1. bills or paper
  2. notes
  3. bonds
9
Q

what are the time to maturity for bills or papers

A

maturities of less than one year

10
Q

what are the time to maturity for notes

A

maturities between 1 and 7 years

11
Q

what are the time to maturity for bonds

A

maturities greater than 7 years

12
Q

what is a bond indenture

A

is the contract between issuer and holder

13
Q

what does a bond indenture specify

A
  1. details regarding payment terms
  2. collateral
  3. positive or negative covenants
  4. par value or face value (usually increments of $1,000)
  5. bond pricing, usually shown as the price per $100 of par value (which is equal to a percentage of the bond’s face value)
14
Q

what is term to maturity

A

time remaining to the maturity date

15
Q

what is the coupon rate

A

the annual percentage interest paid on the bond’s face value

16
Q

how are mortgage bonds secured

A

by real assets (like a house)

17
Q

are debentures secured?

A

they are either unsecured or secured, wit a floating charge over the firm’s assets

18
Q

collateral trust bonds are secured by what

A

pledged financial assets such as

  • common stock
  • other bonds or
  • treasury bills
19
Q

equipment trust certificates are secured by what

A

pledged equipment, such as

- railway rolling stock

20
Q

what are covenants

A

another type of protective provision

21
Q

what are positive covenants

A

specify actions the firm agrees to do such as

  • supply periodic f.s.
  • maintain certain ratios
22
Q

what are negative covenants

A

specify actions the firm agrees to avoid such as

  • restrictions on the size of its debt
  • or acquiring or disposing of assets
23
Q

what are some additional bond features

A
  1. call
  2. retractable bonds
  3. extendible bonds
  4. sinking funds
  5. convertible bonds
24
Q

what is a call

A

this feature allows the issuer to redeem or pay off the bond prior to maturity

25
Q

what is retractable bonds

A

allows the holder to extend bonds back to the issuer before maturity

A bond that features an option for the holder to force the issuer to redeem the bond before maturity at par value.

26
Q

what is sinking funds

A

are funds set aside by the issuer to ensure the firm is able to redeem the bond at maturity

27
Q

what are convertible bonds

A

can be converted to common stock at a pre-determined conversion price