AFM 121 CHAPTERS 6+ EXAM QUESTIONS AND ANSWERS
WITH COMPLETE SOLUTIONS GRADED A++
What does fixed income include?
bonds, debentures, mortgagees, swaps, preferred shares
Fixed streams of cash flows
Coupon payments over time
Principle repayments at maturity
What is a bond
A long-term debt instrument in which a borrower agrees to make payments of principal
and interest, on specific dates, to the holders of the bond.
bonds are secured by specific assets in the event of default, the bondholder can seize
collateral.
What are debentures?
unsecured bonds, that have no collateral beyond the general income and assets of the
borrower.
Bond terms
bond terms are described in a bond trust, which outlines the legal rights of the borrower
(the company) and the lender (the investors).
They include:
- Dates of amount coupon payments
,- dates of principle repayments
-covenants (restrictions)
Bond prices are based on what.
They are based on the par or face value of the $100 (or $1000)
- EX: price per $100 of face value of the bond
You pay either the premium:
- pay 104 for the 100 of face value
you pay the discount:
- You pay $96 for $100 of face value.
Discounted Bonds
These are the bonds that do not include a coupon payment. Instead, they are sold at a
discount (below par value) and investors earn the difference between the price and the
face value at maturity.
so if the price is 90 per 100 face value the investor earns $10 dollars.
Price changes are considered interest income for tax purposes. No capital gains
Bonds are divided into different time frames which are
Short terms: Bonds mature in 1 - 5 years.
Medium term: bonds mature in 5 - 10 years.
long term value matures over 10 years from now.
Liquid bonds
Bonds that trade in significant volumes and can be made quickly without a significant
sacrifice on the price.
Marketable bonds
, have an existing market.
with on-the-run bonds are newly issued
off the run bonds are older, no longer new.
What is larger the bond or equity market
Bond market is larger as they are measured by $ traded.
Since there are more bonds than stocks what does that mean
It means that each bond is less liquid.
What are the two things a bonds coupon rate can be used
It can either be floating or fixed
What is a floating rate
Where the rate adjusts periodically. such as resetting every 90 days to the governments
90-day T-bill yield.
What is a fixed rate?
Never adjusts Coupon rate is same for entire life of the bond
Bonds have a maturity date but,
but the maturity date can be modified by the terms of the bonds.
Callable bonds:
Can be called or repurchased by the issuer before the maturity date.
- Price of repurchases set out in the bond trust
Retractable bonds
can be put back to the issuer (bonds holders force the repurchase)
Bond planned repurchases:
Some bonds require the issuer, to repurchase portions of the bond issue over time.
WITH COMPLETE SOLUTIONS GRADED A++
What does fixed income include?
bonds, debentures, mortgagees, swaps, preferred shares
Fixed streams of cash flows
Coupon payments over time
Principle repayments at maturity
What is a bond
A long-term debt instrument in which a borrower agrees to make payments of principal
and interest, on specific dates, to the holders of the bond.
bonds are secured by specific assets in the event of default, the bondholder can seize
collateral.
What are debentures?
unsecured bonds, that have no collateral beyond the general income and assets of the
borrower.
Bond terms
bond terms are described in a bond trust, which outlines the legal rights of the borrower
(the company) and the lender (the investors).
They include:
- Dates of amount coupon payments
,- dates of principle repayments
-covenants (restrictions)
Bond prices are based on what.
They are based on the par or face value of the $100 (or $1000)
- EX: price per $100 of face value of the bond
You pay either the premium:
- pay 104 for the 100 of face value
you pay the discount:
- You pay $96 for $100 of face value.
Discounted Bonds
These are the bonds that do not include a coupon payment. Instead, they are sold at a
discount (below par value) and investors earn the difference between the price and the
face value at maturity.
so if the price is 90 per 100 face value the investor earns $10 dollars.
Price changes are considered interest income for tax purposes. No capital gains
Bonds are divided into different time frames which are
Short terms: Bonds mature in 1 - 5 years.
Medium term: bonds mature in 5 - 10 years.
long term value matures over 10 years from now.
Liquid bonds
Bonds that trade in significant volumes and can be made quickly without a significant
sacrifice on the price.
Marketable bonds
, have an existing market.
with on-the-run bonds are newly issued
off the run bonds are older, no longer new.
What is larger the bond or equity market
Bond market is larger as they are measured by $ traded.
Since there are more bonds than stocks what does that mean
It means that each bond is less liquid.
What are the two things a bonds coupon rate can be used
It can either be floating or fixed
What is a floating rate
Where the rate adjusts periodically. such as resetting every 90 days to the governments
90-day T-bill yield.
What is a fixed rate?
Never adjusts Coupon rate is same for entire life of the bond
Bonds have a maturity date but,
but the maturity date can be modified by the terms of the bonds.
Callable bonds:
Can be called or repurchased by the issuer before the maturity date.
- Price of repurchases set out in the bond trust
Retractable bonds
can be put back to the issuer (bonds holders force the repurchase)
Bond planned repurchases:
Some bonds require the issuer, to repurchase portions of the bond issue over time.
