WALL STREET PREP: BONDS CRASH COURSE EXAM
QUESTIONS WITH COMPLETE SOLUTIONS
What is the focus of the course?
analysis of debt
Where does demand for bonds come from?
Demand comes from governments, corporations, and households.
What are Fixed income securities?
Fixed income securities: financial instruments that require the borrower to pay a
predetermined amount to the holder of the security in exchange for capital upfront.
Example of a fixed income security
Example: a corporation needs to borrow $5,000,000. Corporation will issue a fixed
income security. Owners of securities, such as investors, now have the right to receive
predetermined amounts in exchange for giving that $5,000,000 upfront.
What are the 2 broad types of debt?
Bonds and Loans
What do the government, households, and corporations use to borrow?
- Government borrows primarily with bonds
- Corporations use primarily both
- Households: borrow with loans, which sometimes may get turned into securitized
bonds
Debt from non-financial corporations
Non-financial corporations: The US is most heavily weighted towards corporate bonds.
Debt from households
Household debt: The US is most heavily weighted towards securitization, while
traditional bank loans dominate elsewhere.
What is securitization?
the procedure where an issuer designs a marketable financial instrument by merging or
pooling various financial assets into one group.
Who dominates the debt market?
, The United States dominates the debt market
% of global Debt:
United States: 40%
Non-US Developed Countries: 46%
Emerging markets: 14%
Bullet bond
- Bond in which the principal repayment is made entirely at maturity.
- Also known as conventional or vanilla bond
- common for corporate + long term government bonds
Zero coupon bond
- a bond that pays no coupons over its maturity. Get all of money at the end, rather than
spread out throughout the amount of years
- Common for short term government bonds
annuity bond
- combines interest and principle to create even payments every period
- Typically issued by insurance companies as a retirement investment product as well
as by financing firms for mortgages and car loans
Notes
unsecured debt with original maturity less than 10 years
Face value / par value / future value
The price of the bond at the maturity date + the interest for that year
Coupon rate
amount of coupon / face value
Rate of return
- Total return = Future value / par value - 1
- Annual return = (Future value / par value)^1 / # of years - 1
Nominal yield
coupon / par value
Current yield
coupon / bond price
yield to maturity
QUESTIONS WITH COMPLETE SOLUTIONS
What is the focus of the course?
analysis of debt
Where does demand for bonds come from?
Demand comes from governments, corporations, and households.
What are Fixed income securities?
Fixed income securities: financial instruments that require the borrower to pay a
predetermined amount to the holder of the security in exchange for capital upfront.
Example of a fixed income security
Example: a corporation needs to borrow $5,000,000. Corporation will issue a fixed
income security. Owners of securities, such as investors, now have the right to receive
predetermined amounts in exchange for giving that $5,000,000 upfront.
What are the 2 broad types of debt?
Bonds and Loans
What do the government, households, and corporations use to borrow?
- Government borrows primarily with bonds
- Corporations use primarily both
- Households: borrow with loans, which sometimes may get turned into securitized
bonds
Debt from non-financial corporations
Non-financial corporations: The US is most heavily weighted towards corporate bonds.
Debt from households
Household debt: The US is most heavily weighted towards securitization, while
traditional bank loans dominate elsewhere.
What is securitization?
the procedure where an issuer designs a marketable financial instrument by merging or
pooling various financial assets into one group.
Who dominates the debt market?
, The United States dominates the debt market
% of global Debt:
United States: 40%
Non-US Developed Countries: 46%
Emerging markets: 14%
Bullet bond
- Bond in which the principal repayment is made entirely at maturity.
- Also known as conventional or vanilla bond
- common for corporate + long term government bonds
Zero coupon bond
- a bond that pays no coupons over its maturity. Get all of money at the end, rather than
spread out throughout the amount of years
- Common for short term government bonds
annuity bond
- combines interest and principle to create even payments every period
- Typically issued by insurance companies as a retirement investment product as well
as by financing firms for mortgages and car loans
Notes
unsecured debt with original maturity less than 10 years
Face value / par value / future value
The price of the bond at the maturity date + the interest for that year
Coupon rate
amount of coupon / face value
Rate of return
- Total return = Future value / par value - 1
- Annual return = (Future value / par value)^1 / # of years - 1
Nominal yield
coupon / par value
Current yield
coupon / bond price
yield to maturity
