Podcast
Questions and Answers
What term describes bonds that have remaining maturities of more than one year but less than five years?
What term describes bonds that have remaining maturities of more than one year but less than five years?
When a bond originally classified as long-term reaches its maturity after eight years, what classification does it assume?
When a bond originally classified as long-term reaches its maturity after eight years, what classification does it assume?
Which of the following statements about liquidity in bond trading is true?
Which of the following statements about liquidity in bond trading is true?
What characteristic distinguishes money market securities from other bonds?
What characteristic distinguishes money market securities from other bonds?
Signup and view all the answers
How would a bond that was issued with a term of 15 years change classification over time?
How would a bond that was issued with a term of 15 years change classification over time?
Signup and view all the answers
What is the primary reason issuers might choose to call a bond before its maturity?
What is the primary reason issuers might choose to call a bond before its maturity?
Signup and view all the answers
Which of the following best describes a callable bond?
Which of the following best describes a callable bond?
Signup and view all the answers
How many different strip coupons can be created from a $10 million face value bond with a coupon of 5.50% paid semi-annually?
How many different strip coupons can be created from a $10 million face value bond with a coupon of 5.50% paid semi-annually?
Signup and view all the answers
What is the face value of each strip coupon if the total investment is $10 million with a 5.50% coupon payment?
What is the face value of each strip coupon if the total investment is $10 million with a 5.50% coupon payment?
Signup and view all the answers
What type of bonds are typically non-callable in Canada?
What type of bonds are typically non-callable in Canada?
Signup and view all the answers
What is the primary feature that differentiates real return bonds from conventional bonds?
What is the primary feature that differentiates real return bonds from conventional bonds?
Signup and view all the answers
How is the maturity amount of a real return bond determined?
How is the maturity amount of a real return bond determined?
Signup and view all the answers
What does the term 'inflation compensation' refer to in the context of real return bonds?
What does the term 'inflation compensation' refer to in the context of real return bonds?
Signup and view all the answers
If a real return bond's interest payment for a half-year is based on a principal amount adjusted for inflation, what was the basis for calculating the interest payment after six months if the inflation was 1.5%?
If a real return bond's interest payment for a half-year is based on a principal amount adjusted for inflation, what was the basis for calculating the interest payment after six months if the inflation was 1.5%?
Signup and view all the answers
Which statement correctly describes the interest payment schedule for real return bonds?
Which statement correctly describes the interest payment schedule for real return bonds?
Signup and view all the answers
What is the typical term to maturity for real return bonds mentioned?
What is the typical term to maturity for real return bonds mentioned?
Signup and view all the answers
Real return bonds provide a real yield that considers which factors?
Real return bonds provide a real yield that considers which factors?
Signup and view all the answers
What is a key benefit of real return bonds in periods of inflation?
What is a key benefit of real return bonds in periods of inflation?
Signup and view all the answers
During what period is the coupon payment calculated for a bond that has a six-month inflation rate of 1.5%?
During what period is the coupon payment calculated for a bond that has a six-month inflation rate of 1.5%?
Signup and view all the answers
If a bond carrying 4.25% coupon was priced at 100 at issue, what is the real yield of this bond to maturity on December 1, 2025?
If a bond carrying 4.25% coupon was priced at 100 at issue, what is the real yield of this bond to maturity on December 1, 2025?
Signup and view all the answers
Study Notes
Bond Pricing and Trading
- Coupon income on bonds remains constant, but yield and price fluctuate daily.
- Bonds are categorized by term to maturity:
- Short-term: More than one year, less than five years.
- Medium-term: Five to ten years.
- Long-term: More than ten years.
- Money market securities: Bonds with terms up to one year.
Bond Lifecycle
- A bond issued eight years ago with a 15-year original term is now classified as a seven-year bond.
- As time passes, bonds transition from long-term to medium-term, then to short-term, and may eventually become money market securities.
Liquidity, Negotiability, and Marketability
- Liquidity refers to bonds that can be traded easily and in large volumes without significant price impacts.
- Government of Canada bonds exemplify good liquidity due to high demand from investors.
- Negotiable bonds can be easily transferred because they are in good delivery form.
Example of Strip Bonds
- An investor can purchase a $10 million Government of Canada bond with a 5.50% coupon, stripping it into 10 coupons of $275,000 each.
- Each strip coupon can be sold at a discount; for example, a coupon maturing in three years may sell today for $233,690.
Callable Bonds
- Callable bonds allow issuers to redeem the bond before maturity to capitalize on lower interest rates.
- A call or redemption feature requires prior notice of 10 to 30 days before calling the bond.
- Callable bonds are common in corporate and provincial issues, while Government of Canada bonds are normally non-callable.
Real Return Bonds
- Real return bonds pay interest and principal adjusted for inflation, providing a fixed real coupon rate.
- For instance, if a bond carries a 4.25% coupon and inflation is 1.5% over six months, the bond's value adjusts to $1,015 for interest calculations.
Provincial and Municipal Government Securities
- These securities are secured against the issuer’s assets and cash flows before unsecured liabilities.
- First mortgage bonds are considered the best form of security due to the after-acquired clause ensuring asset coverage.
Floating-Rate Securities
- Floating-rate securities adjust interest payments based on changing interest rates.
- They are favorable in rising interest rate environments; however, they can disadvantage investors if rates fall.
Bond Classifications
- Domestic bonds are issued in the issuer's currency and country of operation and are distinct from foreign and Eurobonds.
Commercial Paper
- Commercial paper is an unsecured promissory note from a corporation or an asset-backed security with terms from less than three months up to one year.
- It’s sold at a discount, matures at face value, and is rated by agencies based on issuer creditworthiness.
Term Deposits and GICs
- Term deposits provide a guaranteed short-term interest rate, typically up to one year, with penalties for early withdrawal.
- Guaranteed Investment Certificates (GICs) offer fixed rates of interest, guaranteed principal and interest, and can be redeemable or non-redeemable.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz focuses on the concepts of bond pricing and trading, particularly how coupon income, yield, and price vary over time. Additionally, it categorizes bonds based on their term to maturity, which can significantly impact investment decisions.
