Debt Securities
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Terms in this set
- Bond Fundamentals A bond is a loan to the issuer: par (face) value — normally $1,000 — is repaid at maturity, and the coupon (nominal yield) is the fixed annual interest as a percentage of par, usually paid semiannually.
- The Price–Yield Relationship Bond prices and yields move inversely: when market interest rates rise, existing bond prices fall, and when rates fall, prices rise — the single most-tested relationship on the SIE.
- Yield Measures Ways of expressing a bond's return: nominal yield (the fixed coupon), current yield (annual interest ÷ market price), yield to maturity (total return if held to maturity), and yield to call.
- Treasury Securities Direct obligations of the U.S. government: T-bills (one year or less, sold at a discount), T-notes (2–10 years), T-bonds (over 10 years), TIPS (principal adjusts with CPI), and STRIPS (zero-coupon Treasuries).
- Municipal Bonds Debt of states, cities, and other political subdivisions; general obligation (GO) bonds are backed by taxing power, while revenue bonds are repaid from the earnings of a specific facility such as a toll road.
- Corporate Bonds Debt issued by corporations: secured bonds (mortgage bonds, equipment trust certificates) are backed by specific collateral; debentures are backed only by the issuer's credit; subordinated debentures rank below other debt.
- Callable & Convertible Bonds Callable bonds let the ISSUER redeem early — typically when rates fall — so they pay more yield and often include call protection; convertible bonds let the HOLDER exchange the bond for a set number of common shares.
- Money-Market Instruments High-quality debt with one year or less to maturity: Treasury bills, commercial paper (corporate IOUs up to 270 days), negotiable (jumbo) CDs, banker's acceptances, and repurchase agreements.
- Bond Ratings & Credit Quality Letter grades from S&P, Moody's, and Fitch measuring default risk: BBB-/Baa3 and above are investment grade; anything below is high-yield (junk).