Bonds Flashcards
What are the types of nonmarketable US Treasury Issues?
nonmarketable=not easily bought or sold
- Series EE/Series E Bonds
- Series HH/Series H Bonds
- Series I Bonds
Describe Series EE/Series E Bonds:
- Sold at face value, $25 min, 10k annual max; only available through TreasuryDirect (online)
- Offered at one-half of face value
- (EXAM TIP: know) nonmarketable, nontransferable
- Do not pay interest, bond increases in value over 20 year at fixed rate at time of purchase
- Redeemable after one year with 3 month interest penalty if redeemed in less than 5 years
- Interest not subject to federal tax until bond is redeemed (no state or local tax); may qualify for tax-free treatment if redeemed for education expenses
Describe Series HH/Series HBonds:
- Pay interest semi-annually
- Have not been issued since August 2004
Describe Series I Bonds:
- Inflation-indexed bonds issued by US Govt
- Sold at face value, no guaranteed ROR
- Interest has two components:
- Fixed ROR
- Inflation component adjusted every six months
What are the marketable US Treasury Issues?
- all sold in denomintions of $100 or more
- Sold at auction, lowest yield wins
- US Treasury Bills
- maturities less than 1 year
- sold at a discount, no interest, mature at par
- US Treasury Notes
- Maturities between 2-10 years
- interest paid semi-annually
- US Treasury Bonds
- Maturities greater than 10 years
- interest paid semi-annually
What is an Original Issue Discount (OID) bond?
- Issued at discount to par
- Example: zero-coupon bond
- Imputed/Phantom Income: bond holder must recognize income each year, even though no interest paid; pays taxes on the increase in value of the bond
What are Treasury Inflation Protected Securities (TIPS)?
- Bonds that provide inflation and purchasing power protection
- the principal/par value adjusts for inflation, coupon rate applied to new principal amount
- coupon rate does not change
What are Separate Trading of Registered Interest and Principal Securities (STRIPS)?
- Periodic coupon payments are separated from the bond, and each coupon payment, including par value, trade separately
- Essentially STRIPS create zero-coupon bonds
- Highly liquid and appropriate for investors looking for low-risk, highly liquid investment, and with a specific time horizon
Describe bonds issued by Federal Agencies:
- Agency bonds are moral obligations of the US Govt but are not backed by the full faith and credit of the US Govt:
- Exception: GNMA (Ginnie Mae) are backed by US Govt
What are the types of Secured Bonds?
- Mortgage Backed Securities (MBS)
- backed by pool of mortgages
- payments consist of interest and principal
- Biggest risk to bond holder: prepayment
- Collateral Trust Bonds
- Backed by an asset owned by company issuing the bonds
- Asset held in trust by 3rd party
- If default, bond holders entitled to the asset held in trust
What are Collateralized Mortgage Obligations (CMOs)?
- Investors divided into “tranches” which determine who will receive principal repayment
- Tranches divided A - Z, which represent short, interm, long term
- Interest distributed pro-rata and principal repayments used to retire tranches sequentially, short-term receive repayment first
- CMOs meant to mitigate against prepayment risk
What are the types of Unsecured Corporate Bonds?
- Debentures
- Simply unsecured debt not backed by an asset, but by the creditworthiness of the issuing company (or govt) that they will repay
- Subordinated Debentures
- Have a lower claim on assets than other unsecured debt, more risk
- Income Bonds
- Interest is only paid when a specific level of income is attained
Q1: Who are the bond rating Agencies?
Q2: What do they analyze?
Q3: What are the ratings for investment quality and junk?
- A1: Moody’s/Standard and Poor’s
- A2: Liquidity, Total amount of debt, earnings/stability of earnings
- A3:
- Investment Quality
- Moody’s = Aaa - Baa
- S&P = AAA - BBB
- Junk
- Moody’s = Ba and below
- S&P = BB and below
- Investment Quality
What is a Guaranteed Investment Contract (GIC)?
- Issued by insurance companies with a guaranteed ROR for a period of time
- yield higher than treasury secs
What are the types of Muni Bonds?
Not taxable at federal, state, local levels if you live in issuing state, Puerto Rico not subject to Federal, state or local
- General Obligation
- backed by full faith, credit and taxing authority of municipality issuing security
- Revenue
- backed by the revenue of a specific project (NOT FFC and Tax auth)
- Private Activity
- used to finance construction of stadiums
