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CFP Exam > Bonds > Flashcards

Bonds Flashcards

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1
Q

how are US treasuries taxed?

A

only at the federal level (nontaxable at the state and local level)

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2
Q

what are the types of non-marketable US treasury issues?

A
  • Series EE
  • Series HH
  • Series I
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3
Q

what is a Series EE bond?

A

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

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4
Q

what is a Series HH bond?

A

non-marketable US treasury issue

pays interest semiannually

not been issued since August 2004

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5
Q

what is a Series I bond?

A

inflation-indexed bonds issued by the US gov’t

sold at face value and have no guaranteed rate of return

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6
Q

what are the types of marketable US treasury issues?

A
  • US Treasury Bills
  • US Treasury Notes
  • US Treasury Bonds
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7
Q

what is a US Treasury Bill (T-Bill)?

A

have maturities less than 1 year

sold on a discounted yield basis, does not pay interest

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8
Q

what is a US Treasury Note (T-Note)?

A

have maturities between 2-10 years

pay interest semi-annually

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9
Q

what is a US Treasury Bond (T-Bond)?

A

have maturities greater than 10 years

pay interest semi-annually

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10
Q

what denominations are T-Bills, T-Notes, and T-Bonds sold at?

A

denominations of $100 or more

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11
Q

what is an Original Issue Discount (OID) bond?

A

issued at a discount from par value

example is a zero-coupon bond sold at a deep discount to par value

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12
Q

what does TIPS stand for?

A

Treasury Inflation Protected Securities

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13
Q

what are TIPS?

A

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

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14
Q

what does STRIPS stand for?

A

Separate Trading of Registered Interest and Principal Securities

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15
Q

what are STRIPS?

A

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

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16
Q

what are federal agency securities?

A

moral obligations of the US government but are not backed by the full faith and credit of the US government

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17
Q

what is the one exception of the federal agency securities that IS backed by the full faith and credit of the US goverment?

A

GNMAs

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18
Q

what does GNMA stand for?

A

Government National Mortgage Association (Ginnie-Mae)

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19
Q

what does FHA stand for?

A

Farmers Home Administration

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20
Q

what are the types of on-budget debt federal agency securities?

A
  • GNMA

- FHA

21
Q

what are the types of off-budget federal agency securities?

A
  • FNMA
  • FHLMC
  • SLMA
  • FFCB
  • FICB
  • FHLB
22
Q

what does FNMA stand for?

A

Federal National Mortgage Association (Fannie Mae)

23
Q

what does FHLMC stand for?

A

Federal Home Loan Mortgage Corporation (Freddie Mac)

24
Q

what does SLMA stand for?

A

Student Loan Marketing Association (Sallie Mae)

25
Q

what are the types of mortgage-backed securities?

A
  • GNMA
  • FNMA
  • FHLMC
26
Q

what is the biggest risk associated with mortgage-backed securities?

A

falling interest rates

mortgages could get repaid early

27
Q

what are the types of Corporate Bonds?

A
  • Secured Bonds
  • Collateralized Mortgage Obligations
  • Unsecured Bonds
28
Q

what are the types of secured corporate bonds?

A
  • mortgage backed securities (MBS)

- collateral trust bonds

29
Q

what is a mortgage-backed security?

A

backed by a pool of mortgages

payments consist of both interest and principal

biggest risk to bond holder is prepayment risk

30
Q

what is a collateral trust bond?

A

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

31
Q

what is a collateralized mortgage obligation (CMO)?

A

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

32
Q

what are the types of unsecured corporate bonds?

A
  • debentures
  • subordinated debentures
  • income bonds
33
Q

what is a debenture?

A

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

34
Q

what is a subordinated debenture?

A

an unsecured corporate bond

have a lower claim on assets than other unsecured debt

have more risk because of the lower claim on assets

35
Q

what is an income bond?

A

an unsecured corporate bond

stipulate that interest is only paid when a specific level of income is attained

36
Q

what are the bond rating agencies?

A

Moody’s and Standard and Poor’s

37
Q

what is the range of Moody’s ratings?

A

Aaa - C

Aaa-Baa are quality, Ba-C are junk

38
Q

what is the range of Standard and Poor’s ratings?

A

AAA-D

AAA-BBB are quality
BB-D are junk

39
Q

what is a guaranteed investment contract (GIC)?

A

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

40
Q

what are the types of municipal bonds?

A
  • general obligation bonds
  • revenue bonds
  • private activity bonds
41
Q

how are municipal bonds taxed?

A

nontaxable at the federal, state, and local level if you live in the issuing state

42
Q

what is a general obligation municipal bond?

A

backed by the full faith, credit, and taxing authority of the municipality that issued the bond

43
Q

what is a revenue municipal bond?

A

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

44
Q

what is a private activity municipal bond?

A

used to finance construction of stadiums

45
Q

what will happen if an insured municipal bond is in default?

A

the insurance company will pay the interest and principal amounts

46
Q

what is the primary difference between corporate bonds and US government bonds in term of risk?

A

US government bonds are NOT subject to default risk, while corporate bonds are subject to default risk

47
Q

what is the Tax-Equivalent Yield (TEY)?

A

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

48
Q

what is the Tax-Exempt Yield?

A

the after-tax rate of return a taxable corporate bond pays

CFP Exam (24 decks)

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