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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. For questions
like this, raise your hands
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
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
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.