clearlycanadian

Which of the following statements regarding a bond being called is CORRECT? 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.

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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.

clearlycanadian

Which of the following statements regarding nonrefundable bonds is most accurate? Nonrefundable bonds:

A) must be refunded from funds generated from operations, not from outside sources of capital such as new debt or equity issues.

B) may only be called if the source of funds for the redemption is other than a new bond issue with a lower coupon rate.

C) and noncallable bonds are essentially the same.

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Nonrefundable bonds may be called as long as the firm does not use less expensive debt to do so. They may be refunded with outside capital, just not cheaper debt.

clearlycanadian

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 regard to the statements made by Panelist 1 and Panelist 2:

A) both are incorrect.

B) both are correct

C) only one is correct.

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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).

clearlycanadian

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

A) par value plus one year's interest.

B) par value.

C) principal plus a premium.

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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 100 in the fifteenth year, after which the bonds can be called at par.

clearlycanadian

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) Principal repayment can be deferred until it reaches maturity.

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

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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.

clearlycanadian

Which of the following is CORRECT 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) stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.

C) describes the maturity date of the bond.

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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.

mouse123

Which of the following statements about refunding and redemption is most accurate?

A) Bonds redeemed at the special redemption price are typically redeemed at par.

B) An investor concerned about premature redemption is indifferent between a noncallable bond and a nonrefundable bond.

C) A sinking fund is an example of refunding.

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This statement is accurate. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." When bonds are redeemed under the call provisions specified in the bond indenture, these are known as a regular redemptions and the call prices are referred to as "regular redemption prices."  
The other statements are false. A sinking fund is a type of redemption, which refers to the retirement of bonds. An investor concerned about premature redemption would prefer a noncallable bond because a noncallable bond cannot be called for any reason. A bond that is callable but nonrefundable can be called for any reason other than refunding. The term refunding specifically means redeeming a bond with funds raised from a new bond issued at a lower coupon rate. A nonrefundable bond can be redeemed with funds from operations or a new equity issue.

mouse123

Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. If Traynor pays the dirty price, how much will the seller receive at the settlement date?

A) $1,081.00.

B) $1,014.00.

C) $1,047.50.

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The dirty price is equal to the agreed upon, or quoted price, plus interest accrued from the last coupon date. Here, the quoted price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the dirty price = 1,047.50 + 33.50 = 1,081.00.

mouse123

Assume a bond's quoted price is 105.22 and the accrued interest is $3.54. The bond has a par value of $100. What is the bond's clean price?

A) $103.54.

B) $108.76.

C) $105.22.

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The clean price is the bond price without the accrued interest so it is equal to the quoted price.

mouse123

A 5% coupon bond with semi-annual coupon payments on a coupon payment date when the coupon has not been paid yet and the bond has a $1,000 par value. What is the accrued interest of the bond and what is the bond's full price?

Accrued Interest

Full Price

A) $25 $1,000

B) $50 $1,050

C) $25 $1,025

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Accrued interest is found by simply dividing the coupon rate by two and then multiplying the result by $1,000. The full price or dirty price of the bond is the price of the bond plus accrued interest, if any.