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A capital market
• Please raise your papers
after the time allotment
for each question.
• There are
questions(EXPLAIN)
which are answerable by
one or more sentences.
TRUE or FALSE (2pts)
Capital markets include
mortgage market, foreign
exchange market, money market
and bond market.
TRUE or FALSE (2pts)
Bonds are long-term debt
obligations issued by the
government only.
TRUE or FALSE (2pts)
Aside form maturity value of the
bonds, the investor of the bond
shall also earn coupon dividend.
Identify the three types
of Bonds.
Enumeration 3pts
Identify the three types
of Bonds.
1. Treasury notes and
bonds
2. Municipal Bonds
3. Corporate bonds
Enumeration 3pts
TRUE or FALSE (2pts)
Treasury notes and bonds are issued
by the government treasury as well as
corporations in order to finance debt
and other expenditures.
TRUE or FALSE (2pts)
Like treasury bills which belongs to
money market instruments, T-Bonds are
completely risk free and has wider price
fluctuations due to longer maturity.
Explain (5pts)
“Off the run” issues for older
bonds and notes.
Explain (5pts)
“Off the run” issues are bonds
which are near maturity and are
less liquid already than those newly
issued bonds which are illiquid.
STRIPs stands for
.
Identification 3pts
TRUE or FALSE (2pts)
In computing the present value of the
bonds, the interest and the principal
shall be multiplied by present value
factor of ordinary annuity.
PROBLEM SOLVING (5pts)
River Company issued a 7%, 5-year bond with
P5,000,000 face value on December 31, 2018. This
bond was dated September 1, 2018 and was originally
sold to yield 6% annual interest. River uses the
effective interest method for such bond. Assuming
that the coupon interests are paid semiannually
(March 1 and September 1), how much will River
receive if the bond was issued at clean price?
Title and Content Layout with Chart
Chart Title
6
0
Category 1 Category 2 Category 3 Category 4
Series 1 Series 2 Series 3
Primary and Secondary markets for
treasury bonds
For primary market, BoTr issues press release week
before each auction
Bids are submitted by gov’t securities dealers,
businesses and individuals thru Federal Reserve Banks
until 1PM for competitive bids and noon for
noncompetitive bids.
Awards are announced the following day
Secondary markets for T-Bonds occurs directly though
brokers and dealer trades.
True or False (2pts)
Municipal bonds have lower interest rates
compared to taxable bonds such as
corporate bonds.
Two types of Municipal Bonds
Provisions
• Sinking fund provision – the periodic retirement of a
number of bonds
• Call provision – gives issuer right to retire bonds before
maturity
Convertible Bonds
• Bonds that can be converted into common stock
Bond Characteristics
Stock Warrants— bonds that give the bond holder an
opportunity to purchase common stock at a specified price up to
a specified date.
Callable Bonds— bonds that allow the issuer to force the bond
holder to sell the bond back to the issuer at a price above the
par value (at the call price).
Sinking Fund Provisions— bonds that include a requirement that
the issuer retire a certain amount of the bond issue each year.
Identification (2pts)
These bonds are collateralized with tangible
non–real estate property (e.g., railcars and
airplanes)
Identification (2pts)
Bonds that may be exchanged for another
security of the issuing firm at the discretion
of the bondholder.
True or False (2pts)
Debenture bond holders will receive cash
distribution only after mortgage bond and
subordinated debenture bond holders have
been repaid in full
True or False (2pts)
Risky firms commonly attach stock warrants to
their bonds to increase the bonds’
marketability. Rather than paying extremely
high interest rates or accepting very restrictive
bond covenants, the firm attaches stock
warrants to the bonds in order to get investors
to buy them.
Identification (2pts)
Bond issues may include a call provision, which
allows the issuer to require the bond holder to
sell the bond back to the issuer at a given (call)
price—usually set above the par value of the
bond. The difference between the call price and
the face value on the bond is called .
Explain (5pts)
Callable bonds have higher yields (generally
between 0.05 and 0.25 percent) than
comparable noncallable bonds.
True or False (2pts)
The bond issuer provides the funds to the
trustee by making frequent payments to a
sinking fund. This sinking fund accumulates in
value and is eventually used to retire the entire
bond issue at maturity or to periodically
Primary and Secondary
markets for corporate bonds
Primary sales of corporate bond issues
occur through either a public sale
(issue) or a private placement
There are two secondary markets that
trade corporate bonds: the exchange
market (e.g., the NYSE) and the over-
the-counter (OTC) market.
ADDITIONAL INFORMATION
Treasury Inflation Protection Securities (TIPS) - provide returns tied
to the inflation rate
TIPS bonds are used by investors who wish to earn a rate of return
on their investments that keeps up with the inflation rate over time
Prices reported on the exchanges on bond securities are generally
considered to be inexact estimates of prices associated with large
transactions. Thus, in contrast to Treasury securities, secondary
market trading of corporate bonds can involve a significant degree
of liquidity risk.