Bonds Flashcards
What are Non-marketable US Treasury Issues?
Series EE/E Bonds- Sold at face value $25 minimum purchase, $10,000 annual maximum available through TreasuryDirect (online)
Offered at one half face value, nonmarketable nontransferable, do not pay interest periodically, bonds slowly increase in value over 20 years based on fixed rate at time of purchase. Redeemable after one year with 3 months interest penalty if redeemed in less than 5 years. Interest isn’t subject to taxation until redeemed. May qualify for tax free treatment if redeemed for education purposes.
Series HH/H Bonds- Pay interest semiannually
Series HH bonds have not been issued since August 2004
Series I Bonds- Inflation-indexed bonds issued by US Government, no guaranteed rate of returns. Interest has two components: Fixed Rate of Return and Inflation component adjusted every six months
What are Marketable US Securities?
T-Bills- Less than 1 year. Issued at discount
Treasury note 2-10 year interest paid semi-annually
Treasury Bonds - Maturities greater than 10 years, interest paid semi-annually
All sold in denomination of $100 or more. Sold at auction with lowest yield winning
Original Issue Discount
Bond issued at discount from par value. (Example would be a zero coupon bond which is sold at deep discount from par value. Bond holder must recognize income each year even when no interest is received. AKA “Phantom Income” because bond holder doesn’t receive interest, but still must pay taxes on the increase in value of the bond.
Treasury Inflation Protected Securities (TIPS)
TIPS has par value of $1,000 and coupon rate of 4% Initial coupon payment calculated as follows $1,000 * 4% = $40
Subsequently adjusted to reflect inflation rate of 3% therefore new coupon payment will be $1,000 * 1.03 = $1030 (to adjust for inflation)
$1030 * .04 = $41.20 (subsequent coupon payment)
What bonds are a direct obligation of the government and backed by the full faith and credit of the US Government?
GNMAs
-Consist of a pool of FHA/VA Guaranteed mortgages. Each month GNMA distributes interest and principal payments to investors. Interest component subject to both state and federal income taxes. component that is a return of principal is not taxable
What are agency bonds that are moral obligations of the US Governments but are not backed by full faith and credit of government?
FNMA (Federal National Mortgage Association) Fannie Mae
FHLMC (Federal Home Loan Mortgage Corporation) Freddie Mac
SLMA (Student Loan Marketing Association) Sallie Mae
FFCB (Federal Farm Credit Banks)
FICB (Federal Intermediate Credit Banks)
Federal Home Loan Banks (FHLB)
These are all off-budget debt of the agencies
What is biggest risk of mortgage-backed securities?
Falling interest rates. Mortgages get paid off early which leaves investors with reinvestment problems.
Collateral Trust Bond
backed by an asset owned by the company issuing the bonds. Asset held in trust by a 3rd party. In event of default on the debt payment, the bond holders are entitled to asset bein g held in trust
Why were Collateralized Mortgage Obligations created and how do they work?
Investors divided into tranches A-Z which represents short, intermediate, and long term tranches. Interest from the pool of mortgages is distributed pro-rata and principal repayments are used to retire tranches. Short term tranches receive principal repayment before intermediate and long-term tranches. Meant to mitigate against prepayment risk associated with mortgage-backed securities.
What are three types of Unsecured Corporate Bonds?
Debentures- Unsecured debt not backed by any assets. Backed by credit worthiness of issuing company
Subordinated Debentures- Have lower claim on assets than the other unsecured debt.
Income Bonds- Stipulate that interest is only paid when a specific level of income is achieved.
What are the bond rating agencies, what do they analyze, and what are their ratings?
Moody’s ratings Aaa-C
Aaa-Baa are investment grade quality bonds (Moody) Goes MOOOO and Sheeps go Baa Baa
Ba and below are junk bonds
Standard and Poor’s AAA-BBB are investment quality bonds
BB and below are junk bonds
What are guaranteed investment contracts?
Issued by insurance companies with guaranteed rate of return. Insurance company agrees to repay principal and guaranteed rate of return for period of time? Yield is higher than treasury securities.
What are the characteristics of municipal bonds and what are the three types?
Nontaxable at the federal, state, and local level if you live in the issuing state. Bonds issued by territories of the US (Puerto Rico) are not subject to taxes at federal, state, and local levels
1. General Obligation Bonds- backed by full faith, credit, and taxing authority of the municipality.
2. Revenue Bonds- backed by the revenue of the specific project, not backed by the full faith, credit, and taxing authority of the entity that issued the bond.
3. Private activity bonds are used to finance construction of stadiums.
Insured municipal bonds
-American Municipal Bond Assurance Corp
-Municipal Bond Insurance Association Corp
If insured municipal is in default, the insurance company will pay interest and principal amount.
What are the difference types of risk between corporate bonds and US government bonds?
- Reinvestment Risk
- Interest Rate Risk
- Purchasing Power Risk
In addition corporate bonds also have default risk, municipal bonds can also have default risk unless they are insured.
What are the difference types of risk between corporate bonds and US government bonds?
- Reinvestment Risk
- Interest Rate Risk
- Purchasing Power Risk
In addition corporate bonds also have default risk, municipal bonds can also have default risk unless they are insured.
