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Questions and Answers
Every six months a bond pays coupon interest equal to 3% of its par value. This bond is a:
Every six months a bond pays coupon interest equal to 3% of its par value. This bond is a:
- 6% semiannual coupon bond.
- 6% annual coupon bond.
- 3% semiannual coupon bond. (correct)
Assuming bond yields are greater than zero, which of the following statements about zero-coupon bonds is least accurate?
Assuming bond yields are greater than zero, which of the following statements about zero-coupon bonds is least accurate?
- The lower the price, the greater the return for a given maturity.
- A zero coupon bond may sell at a premium to par when interest rates decline. (correct)
- All interest is earned at maturity.
An analyst observes a 5-year, 10% coupon bond with semiannual payments. The face value is £1,000. How much is each coupon payment?
An analyst observes a 5-year, 10% coupon bond with semiannual payments. The face value is £1,000. How much is each coupon payment?
- £100.
- £50. (correct)
- £25.
Restrictions on asset sales and additional borrowings by a bond issuer are best characterized as:
Restrictions on asset sales and additional borrowings by a bond issuer are best characterized as:
A covenant that requires the issuer not to let the insurance coverage lapse on assets pledged as collateral is an example of a(n):
A covenant that requires the issuer not to let the insurance coverage lapse on assets pledged as collateral is an example of a(n):
Which of the following fixed income securities is classified as a money market security?
Which of the following fixed income securities is classified as a money market security?
Which of the following contains the overall rights of the bondholders?
Which of the following contains the overall rights of the bondholders?
A bond's indenture least likely specifies the:
A bond's indenture least likely specifies the:
Features specified in a bond indenture least likely include the bond's:
Features specified in a bond indenture least likely include the bond's:
A bond is trading at a premium if its:
A bond is trading at a premium if its:
Which of the following bond covenants is considered negative?
Which of the following bond covenants is considered negative?
Flashcards
Coupon Rate Definition
Coupon Rate Definition
The coupon rate on a bond is the percentage of its par value that it pays in interest each year.
Semiannual Coupon Bond
Semiannual Coupon Bond
Pays interest twice per year, with each coupon equaling half of the annual coupon rate.
Zero-Coupon Bonds
Zero-Coupon Bonds
Always sell below their par value, or at a discount prior to maturity if it has a positive yield.
Semiannual Coupon Payment
Semiannual Coupon Payment
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Negative Covenants
Negative Covenants
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Affirmative Covenants
Affirmative Covenants
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Affirmative Covenants (Bond)
Affirmative Covenants (Bond)
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Money Market Securities
Money Market Securities
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Indenture (Bond)
Indenture (Bond)
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Bond Indenture Features
Bond Indenture Features
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Bond Indenture
Bond Indenture
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Bond Trading at a Premium
Bond Trading at a Premium
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Negative Covenants (Bonds)
Negative Covenants (Bonds)
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Study Notes
Bond Coupon Rate
- 6% semiannual coupon bonds pay interest twice a year, with each coupon equaling half of the 6%, which is 3% of par value
Zero-Coupon Bonds
- Zero-coupon bonds are always sold below par value, or at a discount, prior to maturity
- The discount amount can fluctuate with interest rate changes
- Zero-coupon bonds are always priced less than par if it yields a positive rate
Semiannual Coupon Bonds
- For a 5-year, 10% coupon bond with semiannual payments and a £1,000 face value, each coupon payment is half of 10% times £1,000, totaling £50
Negative Covenants for Bonds
- Negative covenants are prohibitive, restricting asset sales and additional borrowings
Affirmative Bond Covenants
- Affirmative covenants are actions a borrower must take
- These are administrative, such as complying with regulations or maintaining assets, including insurance coverage on pledged assets
Bond Issuers
- Negative covenants restrict a bond issuer's actions, preventing actions such as selling pledged assets or pledging them for additional debt
Money Market Securities
- Money market securities have original maturities of one year or less
- Fixed income securities with original maturities over one year are capital market securities
Bondholder Rights
- An indenture specifies bondholder rights and the issuer's obligations
- Covenants are specific indenture provisions
- A rights offering is typically associated with an equity security
Bond Indenture
- A bond's indenture specifies the issuer's obligations and restrictions
- The source of funds for repayment may be specified
- Covenants that apply to the issuer may be listed
- The identity of the lender won't be specified
Bond Features Specified in Indenture
- Features specified include the issuer
- Maturity date
- Par value
- Coupon rate and frequency
- Currency
- Bond ratings are assigned by third-party credit rating agencies and can change
Bonds Trading at a Premium
- A bond trades at a premium if its price exceeds its par value
- A bond trades at a discount if its yield exceeds its coupon rate
- Face value and redemption value both refer to par value
Affirmative vs Negative Covenants
- Negative covenants set limitations and restrictions
- Affirmative covenants set administrative activities the borrower promises to do
- No additional debt is considered a negative covenant
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