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Reading 60: Features of Debt Securities - LOS d~ Q6-11

 

Q6. Which of the following statements regarding a bond being called is TRUE? Call prices are known as regular redemption prices when bonds are called at:

A)   under the call provisions specified in the bond indenture.

B)   at the par value.

C)   at a premium.

 

Q7. Which of the following is least likely an amortizing security?

A)   Coupon Treasury bonds.

B)   Bonds with sinking fund provisions.

C)   Mortgage-backed securities (MBS).

 

Q8. The annual Fixed Income Analysts' Forum had just ended and two attendees, James Purcell and Frederick Hanes, were discussing some of the comments made by the panelists. Purcell and Hanes were specifically concerned with the following two statements that were made:

Panelist 1: Mortgage-backed securities and asset-backed securities are both fixed income securities that are backed by pools of loans and are said to be amortizing securities. For many of the loans, no principal payments are required to be made prior to the maturity date. These securities are said to have a bullet maturity structure.

Panelist 2: If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are putable bonds; if the principal is to be repaid over time at the option of the bondholder, then the bonds are termed callable bonds.

With regards to the statements made by Panelist 1 and Panelist 2:

A)   both are correct

B)   only one is correct.

C)   both are incorrect.

 

Q9. Most often the initial call price of a bond is its:

A)   principal plus a premium.

B)   par value plus one year's interest.

C)   par value.

 

Q10. Which of the following is most accurate about a bond with a deferred call provision?

A)   It could be called at any time during the initial call period, but not later.

B)   It could not be called right after the date of issue.

C)   Principal repayment can be deferred until it reaches maturity.

 

Q11. Which of the following is TRUE about the call feature of a bond? It:

A)   stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity.

B)   describes the maturity date of the bond.

C)   stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.

 

[2009] Session 15 - Reading 60: Features of Debt Securities - LOS d~ Q6-11

Q6. Which of the following statements regarding a bond being called is TRUE? Call prices are known as regular redemption prices when bonds are called at: fficeffice" />

A)   under the call provisions specified in the bond indenture.

B)   at the par value.

C)   at a premium.

Correct answer is A)

When bonds are redeemed under the call provisions specified in the bond indenture, these are known as regular redemptions and the call prices are referred to as regular redemption prices which can be either at a premium or at par.

 

Q7. Which of the following is least likely an amortizing security?

A)   Coupon Treasury bonds.

B)   Bonds with sinking fund provisions.

C)   Mortgage-backed securities (MBS).

Correct answer is A)

Coupon Treasury bonds and most corporate bonds are non-amortizing securities because they pay only interest until maturity. At maturity these bonds repay the entire par value or face value. A MBS is backed by pools of loans that generally have a schedule of partial principal payments, making these securities amortizing securities. A sinking fund provision is another example of an amortizing feature of a bond. This feature is designed to pay a part or the entire total of the issue by the maturity date.

 

Q8. The annual Fixed Income Analysts' Forum had just ended and two attendees, James Purcell and Frederick Hanes, were discussing some of the comments made by the panelists. Purcell and Hanes were specifically concerned with the following two statements that were made:

Panelist 1: Mortgage-backed securities and asset-backed securities are both fixed income securities that are backed by pools of loans and are said to be amortizing securities. For many of the loans, no principal payments are required to be made prior to the maturity date. These securities are said to have a bullet maturity structure.

Panelist 2: If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are putable bonds; if the principal is to be repaid over time at the option of the bondholder, then the bonds are termed callable bonds.

With regards to the statements made by Panelist 1 and Panelist 2:

A)   both are correct

B)   only one is correct.

C)   both are incorrect.

Correct answer is C)

Panelist 1 is incorrect. These securities do not have a bullet maturity structure. The payments are structured so that the loan is paid off when the last loan payment is made.
Panelist 2 is incorrect. If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are callable bonds – the call provision grants the issuer an option to retire part of the issue or the entire issue prior to the maturity date. On the other hand, if the principal is to be repaid over time at the option of the bondholder, then these bonds are putable bonds – the put provision entitles the bondholder to put (sell) the issue back to the issuer at the put price (if interest rates increase and the bond’s price declines below the put price).

 

Q9. Most often the initial call price of a bond is its:

A)   principal plus a premium.

B)   par value plus one year's interest.

C)   par value.

Correct answer is A)        

Customarily, when a bond is called on the first permissible call date, the call price represents a premium above the par value. If the bonds are not called entirely or not called at all, the call price declines over time according to a schedule. For example, a call schedule may specify that a 20-year bond issue can be called after 5 years at a price of 110. Thereafter, the call price declines by a dollar a year until it reaches ffice:smarttags" />100 in the fifteenth year, after which the bonds can be called at par.

 

Q10. Which of the following is most accurate about a bond with a deferred call provision?

A)   It could be called at any time during the initial call period, but not later.

B)   It could not be called right after the date of issue.

C)   Principal repayment can be deferred until it reaches maturity.

Correct answer is B)

A deferred call provision means the issue is initially (say, for the first 5 to 7 years) non-callable, after which time it becomes freely callable. In other words, there is a deferment period during which time the bond cannot be called, but after that, it becomes freely callable.

 

Q11. Which of the following is TRUE about the call feature of a bond? It:

A)   stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity.

B)   describes the maturity date of the bond.

C)   stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.

Correct answer is C)

Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior to maturity. If the bonds are “called,” the bondholder has no choice but to turn in his bonds. Call features give the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lower coupon issues in the event that market interest rates decline during the life of the issue.

Call provisions do not pertain to maturity. A put provision gives the bondholders certain rights regarding early payment of principal.

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redeem regular

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