SERIES 65 ALL QUESTIONS AND ANSWERS SURE
A+
✔✔b. BONDS - ✔✔1. any securities that are founded on debt (you lend to a company
or government, they pay you interest semi-annually until maturity, and then the face
value.
2. are debt (whereas stocks are equity) that represent a financial interest (not
ownership) in a company as a creditor.
3. traded over-the-counter (OTC).
4. In liquidation bondholders get paid first.
✔✔Par
(also known as face value or principal) - ✔✔1. the amount of money paid back once a
bond matures.
2. newly issued bonds usually sell at par, which is normally $1,000 for Corporate bonds.
3. bonds can trade at par, or at a price above the face value (at a premium) or below
face value (at a discount).
✔✔Coupon or Nominal Yield - ✔✔1. the interest rate on bonds, expressed as either a
percentage of the par value, or a dollar amount.
2. the coupon rate is fixed for the life of the bond.
✔✔Yield or Current Yield (CY) - ✔✔1. expressed as a %, is equal to the interest rate
when purchased at par, but changes when price changes.
2. Formula:
= Coupon dollar amount / Current Market Price
OR
= Annual dividend / Current Market Price
✔✔Yield to maturity (YTM) - ✔✔1. the total return anticipated on a bond if the bond is
held until the end of its lifetime, expressed as an annual rate.
2. a bond's IRR.
3. a complex calculation.
, ✔✔Yield to call (YTC) - ✔✔1. the yield of a bond or note if you were to buy and hold the
security until the call date. This yield is valid only if the security is called prior to
maturity.
2. based on the coupon rate, the length of time to the call date and the market price.
✔✔Teeter/Totter Illustration of Par - ✔✔Par--------------------^NY^------------CY---YTM---
YTC
When interest rates rise, the price of bonds in the market falls, and vice versa.
✔✔Bid Price - ✔✔1. the price someone states is willing to pay for the bond.
2. It is quoted in relation to 100, no matter what the par value is.
3. Example: a bond with a bid of 93 is trading at 93% of its par value.
✔✔Callable Bond
(also known as a redeemable bond) - ✔✔1. a bond that can be redeemed by the issuer
prior to its maturity.
2. If interest rates have declined since a company first issued the bonds, it will likely call
its current bonds and reissue them at a lower rate of interest.
✔✔Put Bond - ✔✔a bond that allows its holder to redeem the bond at specified intervals
before maturity and receive the full face value so it is not at risk.
✔✔Bond ratings - ✔✔1. Investment Grade: AAA, AA (high quality), A (strong), BBB
(medium grade)
2. Junk Grade: BB, B (speculative), CCC, CC (highly speculative), C or D (in default).
✔✔Duration - ✔✔1. expressed as a number of years, measures interest rate risk/rate
fluctuations.*
2. a complicated calculation, fortunately for investors, this is a standard data provided in
bond and bond mutual fund information.
*the other main risks that can affect a bond's investment value is credit risk (default).
✔✔Net Present Value (NPV) - ✔✔1. the value (dollar amount) of a future cash flow in
today's dollars (compares the initial cost of a purchase to its total value of future
revenue).
2. If the NPV is positive then it's a good investment. If the NPV is negative then it's not a
good investment.
3. If the net present value of an investment is zero, then the discount rate being used is
the investment's internal rate of return.
4. If the Discount Rate is zero, you have the highest NPV possible. So the higher the
Discount Rate, the lower the NPV.
A+
✔✔b. BONDS - ✔✔1. any securities that are founded on debt (you lend to a company
or government, they pay you interest semi-annually until maturity, and then the face
value.
2. are debt (whereas stocks are equity) that represent a financial interest (not
ownership) in a company as a creditor.
3. traded over-the-counter (OTC).
4. In liquidation bondholders get paid first.
✔✔Par
(also known as face value or principal) - ✔✔1. the amount of money paid back once a
bond matures.
2. newly issued bonds usually sell at par, which is normally $1,000 for Corporate bonds.
3. bonds can trade at par, or at a price above the face value (at a premium) or below
face value (at a discount).
✔✔Coupon or Nominal Yield - ✔✔1. the interest rate on bonds, expressed as either a
percentage of the par value, or a dollar amount.
2. the coupon rate is fixed for the life of the bond.
✔✔Yield or Current Yield (CY) - ✔✔1. expressed as a %, is equal to the interest rate
when purchased at par, but changes when price changes.
2. Formula:
= Coupon dollar amount / Current Market Price
OR
= Annual dividend / Current Market Price
✔✔Yield to maturity (YTM) - ✔✔1. the total return anticipated on a bond if the bond is
held until the end of its lifetime, expressed as an annual rate.
2. a bond's IRR.
3. a complex calculation.
, ✔✔Yield to call (YTC) - ✔✔1. the yield of a bond or note if you were to buy and hold the
security until the call date. This yield is valid only if the security is called prior to
maturity.
2. based on the coupon rate, the length of time to the call date and the market price.
✔✔Teeter/Totter Illustration of Par - ✔✔Par--------------------^NY^------------CY---YTM---
YTC
When interest rates rise, the price of bonds in the market falls, and vice versa.
✔✔Bid Price - ✔✔1. the price someone states is willing to pay for the bond.
2. It is quoted in relation to 100, no matter what the par value is.
3. Example: a bond with a bid of 93 is trading at 93% of its par value.
✔✔Callable Bond
(also known as a redeemable bond) - ✔✔1. a bond that can be redeemed by the issuer
prior to its maturity.
2. If interest rates have declined since a company first issued the bonds, it will likely call
its current bonds and reissue them at a lower rate of interest.
✔✔Put Bond - ✔✔a bond that allows its holder to redeem the bond at specified intervals
before maturity and receive the full face value so it is not at risk.
✔✔Bond ratings - ✔✔1. Investment Grade: AAA, AA (high quality), A (strong), BBB
(medium grade)
2. Junk Grade: BB, B (speculative), CCC, CC (highly speculative), C or D (in default).
✔✔Duration - ✔✔1. expressed as a number of years, measures interest rate risk/rate
fluctuations.*
2. a complicated calculation, fortunately for investors, this is a standard data provided in
bond and bond mutual fund information.
*the other main risks that can affect a bond's investment value is credit risk (default).
✔✔Net Present Value (NPV) - ✔✔1. the value (dollar amount) of a future cash flow in
today's dollars (compares the initial cost of a purchase to its total value of future
revenue).
2. If the NPV is positive then it's a good investment. If the NPV is negative then it's not a
good investment.
3. If the net present value of an investment is zero, then the discount rate being used is
the investment's internal rate of return.
4. If the Discount Rate is zero, you have the highest NPV possible. So the higher the
Discount Rate, the lower the NPV.
