Introduction to Bonds and Bond Characteristics quiz #1 Flashcards
Introduction to Bonds and Bond Characteristics quiz #1
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What is a bond payable and how does it differ from a note payable?
A bond payable is a liability issued to multiple creditors to raise funds, while a note payable typically involves borrowing from a single lender, such as a bank. How is interest typically paid on bonds?
Interest on bonds is usually paid annually or semiannually to bondholders. What happens at the maturity date of a bond?
At the maturity date, the issuer repays the principal amount of the bond to the bondholders. What is a term bond?
A term bond is a bond that has a single maturity date, with the entire principal repaid in a lump sum at the end. What is a serial bond?
A serial bond has multiple maturity dates, with portions of the principal repaid in installments over time. What is a secured bond?
A secured bond is backed by collateral, such as specific assets, which reduces the risk for bondholders. What is a debenture bond?
A debenture bond is not backed by collateral and relies solely on the issuer's creditworthiness, making it riskier for investors. What is a callable bond?
A callable bond can be redeemed by the issuer before its maturity date, usually at a premium price. What is a convertible bond?
A convertible bond can be converted into a predetermined number of shares of the issuing company's common stock. What is the stated rate on a bond?
The stated rate, or coupon rate, is the interest rate specified on the bond that determines the cash interest payments to bondholders. What is the market rate of interest for bonds?
The market rate, or effective rate, is the interest rate currently being offered for similar bonds in the market. How are bond prices typically quoted?
Bond prices are quoted as a percentage of their face value. What does it mean if a bond is quoted at 100?
A bond quoted at 100 is selling at 100% of its face value, meaning it is sold at par. What does it mean if a bond is quoted at 103?
A bond quoted at 103 is selling at 103% of its face value, meaning it is sold at a premium. What does it mean if a bond is quoted at 92.375?
A bond quoted at 92.375 is selling at 92.375% of its face value, meaning it is sold at a discount. What is the face value of a bond?
The face value is the principal amount of the bond that will be repaid at maturity. When is a bond sold at a discount?
A bond is sold at a discount when its stated rate is lower than the market rate. When is a bond sold at a premium?
A bond is sold at a premium when its stated rate is higher than the market rate. Why might a company issue bonds instead of taking a bank loan?
A company might issue bonds to raise large amounts of money from multiple investors, which may be easier or more flexible than obtaining a single large bank loan. How does collateral affect the risk of a bond?
Collateral reduces the risk for bondholders because they can claim the collateral if the issuer defaults. Why do debenture bonds carry more risk than secured bonds?
Debenture bonds carry more risk because they are not backed by collateral and depend solely on the issuer's ability to repay. What is the call price of a callable bond?
The call price is the amount paid by the issuer to redeem a callable bond before maturity, often higher than the face value. What is the main advantage for investors in holding convertible bonds?
Convertible bonds offer investors the option to convert their bonds into common stock, potentially benefiting from stock price appreciation. How does the stated rate affect the cash interest paid to bondholders?
The stated rate determines the amount of cash interest paid to bondholders during each interest period. How does the market rate influence the price at which a bond is sold?
If the market rate is higher than the stated rate, the bond sells at a discount; if lower, the bond sells at a premium. What happens if a bond's stated rate equals the market rate?
If the stated rate equals the market rate, the bond is sold at its face value (par). Why would investors pay more than face value for a bond?
Investors pay more than face value (a premium) when the bond's stated rate is higher than the market rate, making it more attractive. Why would investors pay less than face value for a bond?
Investors pay less than face value (a discount) when the bond's stated rate is lower than the market rate, making it less attractive. What is the relationship between bond prices and interest rates?
Bond prices move inversely to interest rates: when market rates rise, bond prices fall, and vice versa. What is the purpose of issuing bonds for a company?
Issuing bonds allows a company to raise funds from multiple investors for business operations or expansion. How does a company repay bondholders at maturity?
The company repays the face value of the bond to bondholders at the maturity date. What is the difference between annual and semiannual interest payments on bonds?
Annual interest is paid once per year, while semiannual interest is paid twice per year. What is a lump sum payment in the context of bonds?
A lump sum payment refers to repaying the entire principal amount at the bond's maturity date. How do serial bonds differ from term bonds in principal repayment?
Serial bonds repay principal in installments over time, while term bonds repay all principal at once at maturity. What is the main risk for investors in debenture bonds?
The main risk is the lack of collateral, so investors may lose their investment if the issuer defaults. Why might a company choose to issue callable bonds?
A company may issue callable bonds to retain the flexibility to repay debt early if interest rates decline. What is the benefit to a company of issuing convertible bonds?
Convertible bonds may attract investors by offering the potential to convert to equity, possibly allowing the company to offer a lower interest rate. What does it mean for a bond to be issued at par?
A bond issued at par is sold at its face value. How is the selling price of a bond calculated when quoted as a percentage?
Multiply the face value by the quoted percentage (as a decimal) to get the selling price. What is the impact on a company's liabilities when it issues bonds at a discount?
The company records a liability equal to the face value, but receives less cash, with the difference recorded as a discount.
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