Senior Seminar:
Bond questions
January 2016
Uncle Sam
1. Place in the order of priority in the case of bankruptcy (who will receive
proceeds from any remaining assets):
a. Preferred Stock -4
b. Junior Notes -3
c. Secured (Collateralized) Bonds -1
d. Senior Notes -2
e. Common Stock -5
2. An investor in a bond held until maturity will receive coupon payments plus the
repayment at maturity. T F
3. The coupon payments, plus the difference between the price paid and the
repayment at maturity, is known as the _Yield to Maturity__________.
4. The yield of a bond minus the yield of a similar maturity US Treasury bond, is a
common measure of risk and is known as _Spread to Treasuries____________.
5. Bond yields are effectively the interest rate the corporation or entity would pay
to borrow money for a particular length of time. T F
6. Borrowing rates rise with _risk_______ and __inflation_____.
7. Corporate bonds rated BB or lower are known as __high yield___ or __junk
bonds______.
8. Corporate bonds rated BBB or higher are known as ___investment
grade_________________.
9. How are mortgage bonds or other types of Asset-Backed Securities
created?___Pools of similar loans or mortgages are bundled together into a
trust, which then issues a bond which pays out the monthly payments received
plus repayments at maturity. The investor bears the risk of any individual
loans not being repaid.
__________________________________________________________________
10. When interest rates rise, bond prices ___fall____________.
11. When the economy rises, interest rates typically __rise________ and bond
prices ___fall_____________.
12. Most bonds pay investors a fixed coupon. When investors demand higher
interest rates, in order to receive a higher yield to maturity, investors will need
higher ____capital gains_ in addition to coupon income. This means they will
pay a __lower__________ price.
13. Bond Rating Agencies research and rate the likelihood of ___bonds not repaying
at maturity__________________________________________________.
14.Bonus questions: What is the duration of a bond?__Technically, it is the
weighted average of the bond’s cash flows, using PVs of those cash flows. For
investment managers, it is a measure of the sensitivity of the bond to changes
in interest rates______What is the DV01 of a bond?___The change in bond price
for a 1 basis point change in yield_______________________