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CFP - Tracie > 513 - Module 2 > Flashcards

513 - Module 2 Flashcards

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1
Q

After tax yield

A

Used to compare the advisability of investing in taxable issues with that of investing in municipal tax=exempt issues.

pretax return x (1 - marginal tax rate)

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2
Q

Basis Point

A

A measurement of a bond’s yield, equal to 1/100 of 1% of yield.

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3
Q

Bond

A

Debt security obligating the issuer to make periodic interest payments and to repay the principal at the time of maturity.

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4
Q

Bond barbells

A

Strategy of buying short term and long term bond issues. Long term locks in attractive interest rates, and short term provides opportunity for reinvestment in other assets if the bond market declines.

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5
Q

Bond bullets

A

Strategy of having several bonds mature at the same time, thus minimizing interest rate risk.

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6
Q

Bond ladder

A

A long term strategy for diversifying and staggering maturity dates in a client’s bond portfolio and subsequently establishing a schedule for reinvesting the bond proceeds as they mature.

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7
Q

Bond swaps

A

Selling one debt security and replacing it with another, to increase YTM, save on income taxes, or reduce the interest rate risk.

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8
Q

Call provision

A

Allows the issuer to pay off the bond principal after a specified period, usually at a stipulated price higher than par value. (Likely to happen when market interest rates have declined.)

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9
Q

Conversion price

A

The stock price at which a convertible bond can be exchanged for shares of the issuer’s common stock.

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10
Q

Conversion ratio

A

The number of shares of stock into which a bond may be converted.

par value of convertible security
_________________________________
conversion price

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11
Q

Convertible bonds

A

Corporate bonds that may be exchanged for a fixed number of shares of the issuing company’s common stock.

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12
Q

Convertible preferred stock

A

Can be exchanged for common stock at a conversion ratio determined when the shares are issued.

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13
Q

Corporate bonds

A

Debt securities issued by public and private companies to raise capital.

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14
Q

Coupon rate

A

(Nominal yield) The stated annual interest rate that will be paid each period for the term of the bond and is stated as a percentage of the par value of the bond.

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15
Q

Debenture

A

Unsecured bond, promises payments of interest and principal but pledges no specific assets, usually with a higher yield than a secured bond.

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16
Q

Discount

A

A bond’s price in the secondary market is less than the bond’s par value.

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17
Q

Downside risk

A

The dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond.

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18
Q

Eurobonds

A

Bonds denominated in foreign currency.

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19
Q

Eurodollar bonds

A

Bonds sold outside of the US denominated in US dollars, and not registered with the SEC.

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20
Q

Federal Home Loan Mortgage Corporation (FHLMC)

A

Freddie Mac - Created to promote the development of a secondary market in mortgages by purchasing conventional mortgages from financial institutions and packaging them into mortgage-backed securities for sale to investors. Significant reinvestment rate risk due to prepayment of mortgages.

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21
Q

Federal National Mortgage Association (FNMA)

A

Fannie Mae - Just like Freddie Mac, but is a government sponsored corporation that is owned entirely by private stockholders. Backed by their own credit, not the federal government.

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22
Q

Flat yield curve

A

Occurs when the economy is peaking and therefore no change to interest rates is expected.

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23
Q

General obligation bonds (GOs)

A

Full faith and credit bonds. Municipal bonds that are issued to finance capital improvements benefiting the community.

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24
Q

Government National Mortgage Association (GNMA)

A

Ginnie Mae - Buys FHA and VA mortgages and auctions them to private lenders that pool them to create pass-through certificates for sale to investors.

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25
Q

High yield bond

A

Junk bond - Bond that is rated BB+ or lower by S&P rating service, lower quality and higher risk of default.

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26
Q

Indenture

A

Formal agreement or contract between the issuer and the bondholder.

27
Q

Intermarket spread swap

A

Exchange of one type of bond for another (ie. government for corporate).

28
Q

Inverted yield curve

A

Occurs when the Federal Reserve has tightened credit in an inflationary economy; it predicts interest rates will fall and can sometimes signal an upcoming economic recession.

29
Q

Investment grade bond

A

Bond rated BBB- or higher by S&P rating service, high quality with little risk of default.

30
Q

Investment value

A

A bond’s investment value is the same as its intrinsic value as a straight bond.

31
Q

Liquidity preference theory

A

Based on the expectations theory but incorporates a liquidity premium into the model. This theory holds that long-term bonds should provide higher returns than shorter-term obligations because investors are willing to sacrifice some yield to invest in short-term bonds in order to avoid the higher price volatility of longer-term issues.

32
Q

Market discount bond

A

A bond that is purchased on the market at a discount.

33
Q

Market premium bond

A

A bond that is purchased on the market at a premium, usually when interest paid is greater than that of the current market on bonds of similar quality and risk.

34
Q

Market segmentation theory

A

Relies on the laws of supply and demand for various maturities of borrowing and lending. Three different markets:
1. Short term, one year or less
2. Intermediate term, one to five years
3. Long term, greater than 5 years

35
Q

Maturity date

A

When the principal of the bond will be repaid.

36
Q

municipal bonds

A

Debt obligations issued by states, counties, parishes, cities, and towns to finance various projects.

37
Q

Nominal yield

A

(Coupon rate) The stated annual interest rate that will be paid each period for the term of the bond and is stated as a percentage of the par value of the bond.

38
Q

Normal (positive) yield curve

A

Occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future.

39
Q

Original issue discount (OID)

A

Bond issued at a discount, investor receives phantom income, and must pay taxes on a portion of the discount, then the basis is increased by that amount each year.

40
Q

Par value

A

(Face value) The amount of principal that the bond owner or holder will receive at the time of maturity.

41
Q

Phantom income

A

Unrealized interest earned that is taxable income in the year that it was earned.

42
Q

Portfolio immunization

A

An interest rate management technique which offsets interest rate risk against reinvestment rate risk.

43
Q

Preferred stock

A

A hybrid security with characteristics of both debt and equity securities. They receive dividends equal to a stated percentage of the par value of the stock like a bond, but is not guaranteed payment of the dividend, like a stock

44
Q

Premium

A

A bond’s price in the secondary market is greater than the bonds par value.

45
Q

Private activity (private purpose) bond

A

Part of a state or local government bond issue where more than 10% to be used for a private business purpose.

46
Q

Promissory note

A

A promise to pay a certain sum of money or make a series of payments to others, usually individuals.

47
Q

Pure yield pickup swap

A

A bond with a lower YTM is exchanged for a bond with a higher YTM.

48
Q

Qualified private activity bonds

A

Tax-exempt bonds issued by a local or state government for a qualified purpose by and entity other than the government. More than 95% must be used for IRA-qualified purposes.

49
Q

Rate anticipation swap

A

Exchange to take advantage of expected changes in interest rates.

50
Q

Revenue bonds

A

Used to finance any municipal facility that generates sufficient income to satisfy the ongoing debt obligation. More risky than GOs and offer higher yields.

51
Q

Savings bonds

A

Bonds that are part of the federal government debt structure, used for funding education or gifting. Series E, EE, H, HH and I bonds.

52
Q

Secured bond

A

Pledges specific assets that may be sold by the bond purchaser in the event that the bond issuer defaults in paying either the interest or principal.

53
Q

Subordinated debentures

A

Corporate bonds that aren’t secured, and carry more risk because other debts are paid first in the case of bankruptcy. Still less risk than common stock (last to be paid off).

54
Q

Substitution swap

A

Selling bonds with identical characteristics but different selling prices.

55
Q

Tax swap

A

Taking a loss on a bond to save on taxes, and reinvesting the remaining proceeds of the sale.

56
Q

Taxable equivalent yield (TEY)

A

Yield of a corporate (taxable) bond must make to outperform a municipal (tax-exempt) bond.

tax-exempt yield
__________________
1 - marginal tax rate

57
Q

Treasury Inflation Protection Securities (TIPS)

A

Marketable securities whose principal is adjusted by changes in the Consumer Price Index

58
Q

Treasury STRIPS

A

Separate Trading of Registered Interest and Principal of Securities - Zero-coupon bonds created by separating the semiannual coupon payments and the principal repayment portions of a US T-note or T-bond.

59
Q

Unbiased expectations theory

A

States that long-term rates consist of many short-term rates and that long-term rates will be the average (or geometric mean) of short-term rates.

60
Q

US Treasury bonds

A

Treasury investment with a maturity of 30 years.

61
Q

US Treasury notes

A

Treasury investment with a maturity of 2, 3, 5, 7, or 10 years.

62
Q

Yankee bonds

A

Foreign bonds payable in US dollars.

63
Q

Yield curve

A

A graph of interest rate yields for bonds of the same quality, ranging in maturity from 31 days to 30 years.

64
Q

Zero coupon bonds

A

OID bonds. Sold at a deep discount and investors receive the full face value at maturity, no periodic payments.

CFP - Tracie (11 decks)

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