Fixed Income Securities
Chapter 1 Questions:
3, 4, 12, 14, 15a, 15b, 16, 17, 21, 23, 24, 25
3. Who are the major types of issuers of bonds in the United States?
The major types of issuers of bonds in the United States are the United States Government and its agencies, municipal governments and corporations or Special Purpose Vehicles (SPV).
4. What is the cash flow of a 10-year bond that pays coupon interest semiannually, has a coupon rate of 7%, and has a par value of $ 100,000?
The periodic cash flow is $3,500 as well as the principal pay back of $100,000 coinciding with the last payment of $3,500.
12. a. What is meant by an amortizing security?
An amortizing security is created from loans that have an amortization schedule. These securities will then have a schedule of periodic principal repayments.
12. b. Why is the maturity of an amortizing security not a useful measure?
The stated maturity of such securities only identifies when the final principal payment will be made. The repayment of the principal is being made over time.
13. What is a bond with an embedded option?
A provision included in the indenture of a bond that gives either the bondholder and/or issuer an option to take some action against the other party.
14. What does the call provision for a bond entitle the issuer to do?
A call provision grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date.
15. a. What is the advantage of a call provision for an issuer?
The advantage of a call provision to the issuer is that it allows the issuer to replace an outstanding bond issue with a new bond issue that has a lower coupon rate than the outstanding bond issue because market interest rates have declined.
15. b. What are the disadvantages of a call provision for the bondholder?
The cash flow is not known for certainty. The Issuer will call the bond when interests rates lower, exposing the investor to reinvestment risk. The capital appreciation potential is
3, 4, 12, 14, 15a, 15b, 16, 17, 21, 23, 24, 25
3. Who are the major types of issuers of bonds in the United States?
The major types of issuers of bonds in the United States are the United States Government and its agencies, municipal governments and corporations or Special Purpose Vehicles (SPV).
4. What is the cash flow of a 10-year bond that pays coupon interest semiannually, has a coupon rate of 7%, and has a par value of $ 100,000?
The periodic cash flow is $3,500 as well as the principal pay back of $100,000 coinciding with the last payment of $3,500.
12. a. What is meant by an amortizing security?
An amortizing security is created from loans that have an amortization schedule. These securities will then have a schedule of periodic principal repayments.
12. b. Why is the maturity of an amortizing security not a useful measure?
The stated maturity of such securities only identifies when the final principal payment will be made. The repayment of the principal is being made over time.
13. What is a bond with an embedded option?
A provision included in the indenture of a bond that gives either the bondholder and/or issuer an option to take some action against the other party.
14. What does the call provision for a bond entitle the issuer to do?
A call provision grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date.
15. a. What is the advantage of a call provision for an issuer?
The advantage of a call provision to the issuer is that it allows the issuer to replace an outstanding bond issue with a new bond issue that has a lower coupon rate than the outstanding bond issue because market interest rates have declined.
15. b. What are the disadvantages of a call provision for the bondholder?
The cash flow is not known for certainty. The Issuer will call the bond when interests rates lower, exposing the investor to reinvestment risk. The capital appreciation potential is