Bonds Flashcards
how are US treasuries taxed?
only at the federal level (nontaxable at the state and local level)
what are the types of non-marketable US treasury issues?
- Series EE
- Series HH
- Series I
what is a Series EE bond?
non-marketable, non-transferable US treasury issue
sold at face value, $25 minimum purchase price available only through TreasuryDirect
does not pay interest periodically, bond slowly increases in value over 20 years based on fixed rate at the time of purchase
what is a Series HH bond?
non-marketable US treasury issue
pays interest semiannually
not been issued since August 2004
what is a Series I bond?
inflation-indexed bonds issued by the US gov’t
sold at face value and have no guaranteed rate of return
what are the types of marketable US treasury issues?
- US Treasury Bills
- US Treasury Notes
- US Treasury Bonds
what is a US Treasury Bill (T-Bill)?
have maturities less than 1 year
sold on a discounted yield basis, does not pay interest
what is a US Treasury Note (T-Note)?
have maturities between 2-10 years
pay interest semi-annually
what is a US Treasury Bond (T-Bond)?
have maturities greater than 10 years
pay interest semi-annually
what denominations are T-Bills, T-Notes, and T-Bonds sold at?
denominations of $100 or more
what is an Original Issue Discount (OID) bond?
issued at a discount from par value
example is a zero-coupon bond sold at a deep discount to par value
what does TIPS stand for?
Treasury Inflation Protected Securities
what are TIPS?
bonds that provide inflation and purchasing power protection
principal/par value adjusts for inflation, and then the coupon rate is applied to the new principal amount
coupon rate does not change
what does STRIPS stand for?
Separate Trading of Registered Interest and Principal Securities
what are STRIPS?
bonds where periodic coupon payments are separated from the bond and each coupon payment, including the par value, trade separately
create zero-coupon bonds
highly liquid and appropriate for investors looking for a low risk, highly liquid investment with a specific time horizon
what are federal agency securities?
moral obligations of the US government but are not backed by the full faith and credit of the US government
what is the one exception of the federal agency securities that IS backed by the full faith and credit of the US goverment?
GNMAs
what does GNMA stand for?
Government National Mortgage Association (Ginnie-Mae)
what does FHA stand for?
Farmers Home Administration
what are the types of on-budget debt federal agency securities?
- GNMA
- FHA
what are the types of off-budget federal agency securities?
- FNMA
- FHLMC
- SLMA
- FFCB
- FICB
- FHLB
what does FNMA stand for?
Federal National Mortgage Association (Fannie Mae)
what does FHLMC stand for?
Federal Home Loan Mortgage Corporation (Freddie Mac)
what does SLMA stand for?
Student Loan Marketing Association (Sallie Mae)
what are the types of mortgage-backed securities?
- GNMA
- FNMA
- FHLMC
what is the biggest risk associated with mortgage-backed securities?
falling interest rates
mortgages could get repaid early
what are the types of Corporate Bonds?
- Secured Bonds
- Collateralized Mortgage Obligations
- Unsecured Bonds
what are the types of secured corporate bonds?
- mortgage backed securities (MBS)
- collateral trust bonds
what is a mortgage-backed security?
backed by a pool of mortgages
payments consist of both interest and principal
biggest risk to bond holder is prepayment risk
what is a collateral trust bond?
backed by an asset owned by the company issuing the bond
asset is held in trust by a third party
in the event of a default of the debt payment, the bond holders are entitled to the asset being held in trust
what is a collateralized mortgage obligation (CMO)?
investors are divided into tranches, which determines which investors will receive principal repayment
tranches A-Z
investors in a short-term tranche receive principal repayment before the intermediate and long-term tranche
what are the types of unsecured corporate bonds?
- debentures
- subordinated debentures
- income bonds
what is a debenture?
an unsecured corporate bond
unsecured debt that is not backed by any asset
backed on the belief of the creditworthiness that the issuing company (or government) will repay the debt
what is a subordinated debenture?
an unsecured corporate bond
have a lower claim on assets than other unsecured debt
have more risk because of the lower claim on assets
what is an income bond?
an unsecured corporate bond
stipulate that interest is only paid when a specific level of income is attained
what are the bond rating agencies?
Moody’s and Standard and Poor’s
what is the range of Moody’s ratings?
Aaa - C
Aaa-Baa are quality, Ba-C are junk
what is the range of Standard and Poor’s ratings?
AAA-D
AAA-BBB are quality
BB-D are junk
what is a guaranteed investment contract (GIC)?
issued by insurance companies with a guaranteed rate of return
insurance company agrees to repay the principal and guaranteed rate of return for a period of time
yield is higher than treasury securities
what are the types of municipal bonds?
- general obligation bonds
- revenue bonds
- private activity bonds
how are municipal bonds taxed?
nontaxable at the federal, state, and local level if you live in the issuing state
what is a general obligation municipal bond?
backed by the full faith, credit, and taxing authority of the municipality that issued the bond
what is a revenue municipal bond?
backed by the revenue of a specific project
not backed by the full faith, credit, and taxing authority of the entity that issued the bond
what is a private activity municipal bond?
used to finance construction of stadiums
what will happen if an insured municipal bond is in default?
the insurance company will pay the interest and principal amounts
what is the primary difference between corporate bonds and US government bonds in term of risk?
US government bonds are NOT subject to default risk, while corporate bonds are subject to default risk
what is the Tax-Equivalent Yield (TEY)?
the yield a taxable corporate bond would need to pay for the yield on a tax-exempt muni to be equivalent to a taxable corporate bond
what is the Tax-Exempt Yield?
the after-tax rate of return a taxable corporate bond pays
