Podcast
Questions and Answers
What is the primary characteristic that distinguishes a zero-coupon bond from a vanilla bond?
What is the primary characteristic that distinguishes a zero-coupon bond from a vanilla bond?
- Zero-coupon bonds are secured, while vanilla bonds are unsecured.
- Zero-coupon bonds offer coupon payments throughout the bond's life, while vanilla bonds do not.
- Zero-coupon bonds are repaid at a premium, while vanilla bonds are repaid at a discount.
- Zero-coupon bonds do not offer coupon payments throughout the bond's life, while vanilla bonds do. (correct)
How does the potential for stock conversion typically affect the price of a convertible bond compared to a non-convertible bond?
How does the potential for stock conversion typically affect the price of a convertible bond compared to a non-convertible bond?
- Convertible bonds sell for the same price as non-convertible bonds since the conversion feature is optional.
- Convertible bonds have a price that fluctuates more frequently due to the speculative nature of stock values.
- Convertible bonds sell for a lower price because of the conversion feature.
- Convertible bonds sell for a higher price because of the potential to profit from increases in the company's stock value. (correct)
Which of the following is a typical feature of vanilla bonds?
Which of the following is a typical feature of vanilla bonds?
- Coupon payments that are fixed for the life of the bond (correct)
- Variable interest rates that adjust with market conditions
- Principal repayment made in installments throughout the bond's term
- The option to convert the bond into company stock
What is the key advantage for a bondholder who owns a convertible bond?
What is the key advantage for a bondholder who owns a convertible bond?
How are zero-coupon bonds typically sold in the market?
How are zero-coupon bonds typically sold in the market?
What is the meaning of the term 'unsecured' in the context of vanilla bonds (debentures)?
What is the meaning of the term 'unsecured' in the context of vanilla bonds (debentures)?
What action occurs at the maturity date of a vanilla bond?
What action occurs at the maturity date of a vanilla bond?
Which bond type gives the investor the potential to become a shareholder in the issuing company?
Which bond type gives the investor the potential to become a shareholder in the issuing company?
What is a distinctive feature of zero-coupon bonds at the time of issuance, compared to vanilla bonds?
What is a distinctive feature of zero-coupon bonds at the time of issuance, compared to vanilla bonds?
What might cause bondholders to exercise the conversion option on a convertible bond?
What might cause bondholders to exercise the conversion option on a convertible bond?
Flashcards
Vanilla Bond
Vanilla Bond
A bond that is unsecured, has fixed coupon payments, and repays principal at maturity.
Zero Coupon Bond
Zero Coupon Bond
A fixed-income debt security with no coupon payments, issued at a discount and redeemed at face value.
Convertible Bond
Convertible Bond
A bond that can be exchanged for the issuing company's stock.
Coupon Payments
Coupon Payments
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Face Value
Face Value
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Study Notes
- Vanilla bonds, or debentures, are usually unsecured
- Coupon payments are fixed throughout the bond's term
- The principal is repaid, and bonds are retired at maturity
- Contracts include standard bond covenant features and provisions
- Payments are typically annual or semiannual
Zero Coupon Bond
- There are no coupon payments
- Pays face value upon maturity
- Sold at a significant discount
Convertible Bonds
- These may be exchanged for company stock shares
- They are sold at a premium compared to non-convertible bonds
- Bondholders gain if the company's stock market value increases sufficiently
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