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Investment Planning > Bonds (Lesson 5) > Flashcards

Bonds (Lesson 5) Flashcards

1
Q

US Treasury securities are nontaxable at the

A
  • state and local level
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2
Q

Are Series EE/ Series E Bonds marketable securities

A
  • no they are nonmarketable securities
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3
Q

Series EE bonds are sold at

A

face value

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4
Q

Do Series EE bonds pay interest periodically

A
  • No bond slowly increases in value over 20 years based on fixed rate at time of purchase
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5
Q

When is the interest on Series EE taxable

A
  • not until the bond is redeemed
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6
Q

When does Series HH pay interest

A
  • semiannually
  • not issued since August 2004
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7
Q

What are Series I bonds

A
  • inflation indexed bonds issued by the US government
  • Adjust the interest paid for inflation
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8
Q

What are series I bonds sold at and is the rate or return guaranteed

A
  • Sold at face value
  • no guaranteed rate or return
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9
Q

What is the interest portion on series I bonds consisted of

A
  • Fixed rate of return
  • Inflation component that is adjusted every six months
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10
Q

What are nonmarketable US Tresuries

A
  • Series EE
  • Series HH
  • Series I
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11
Q

What are marketable US tresuries

A
  • US Treasury Bills
  • US Treasury Notes
  • US Treasury Bonds
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12
Q

What are US Treasury bills maturities

A
  • less than 1 year
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13
Q

How are US Treasury bills sold

A
  • On a discounted yield basis which means they do not pay interest
  • Bonds mature at par value
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14
Q

What are US Treasury notes maturities

A
  • between 2 and 10 years
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15
Q

When is interest paid on US Treasury Notes

A
  • Semi annually
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16
Q

What are US Treasury bonds maturities

A
  • greater than 10 years
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17
Q

When is interest paid on US Treasury Bonds

A
  • Interest is paid semi annually
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18
Q

How are treasury securities sold

A
  • on an auction basis with the lowest yield winning the auction
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19
Q

How is an OID bond issued

A
  • at discount from par value
  • EX: A zero coupon bond that is sold at a deep discount to par value. A $1,000 par value zero coupon bond may sell for $600 and the bond will then increase in value over the term of the bond until it matures at par value
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20
Q

When must an investor recognize interest on zero coupon bond

A
  • Every year which is why the bond increases in value each year even though no interest is paid
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21
Q

What type of protection do Treasury Inflation Protected Securities offer

A
  • inflation and purchasing power protection
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22
Q

Does the coupon rate change on a TIPs

A
  • no coupon rate does not change
  • principal/par value adjusts for inflation and then the coupon rate is applied to the new principal amount
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23
Q

What are separate trading of registered interest and principal securities (STRIPS)

A
  • periodic coupon payments are separated from the bond and each coupon payment including the par value trade separately
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24
Q

Treasury STRIPS are essentially

A
  • zero coupon bonds
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25
Q

STRIPS are appropriate for investors looking for

A
  • Low risk
  • High liquid investment
  • Specific time horizon
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26
Q

What are federal agency securities

A
  • are moral obligations of the US government but are not backed by the full faith and credit of the US government
27
Q

What is the exception to an agency bond that is backed by the full faith and credit of the US governement

A
  • GNMAs
28
Q

Is the below agency a on budget or off budget debt

GNMA - Ginnie Mae

A

On Budget

29
Q

Is the below agency a on budget or off budget debt

Farmers Home Administration (FHA)

A

On Budget

30
Q

Is the below agency a on budget or off budget debt

FNMA - Fannie Mae

A

Off Budget

31
Q

Is the below agency a on budget or off budget debt

FHLMC - Freddie Mac

A

Off Budget

32
Q

Is the below agency a on budget or off budget debt

SLMA - Sallie Mae

A

Off Budget

33
Q

Is the below agency a on budget or off budget debt

FFCB - Federal Farm Credit Banks

A

Off Budget

34
Q

Is the below agency a on budget or off budget debt

FICB - Federal Intermediate Credit Banks

A

Off Budget

35
Q

Is the below agency a on budget or off budget debt

FHLB - Federal Home Loan Bank

A

Off Budget

36
Q

What is a GNMA or Ginnie Mae

A
  • Mortgage backed security
  • consists of a pool of FHA/VA guaranteed mortgages
  • Each month GNMA distributes interest and principal payments
37
Q

Are the FNMA or Fannie Mae and FHLMC or Freddie Mac backed by the US government

A
  • Not backed by the US government
38
Q

What is the biggest risk to mortgage backed securities

A
  • falling interest rates
  • causes repayment of mortgages early
39
Q

What are mortgage backed securities (MBS)

A
  • backed by a pool of mortgages
  • payments consist of both interest and principal
  • biggest risk to bond holder is prepayment risk
40
Q

What is a collateral trust bond

A
  • backed by an asset owned by the company issuing the bonds
  • asset is held by a third party
  • in the event of default the bond holders are entitled to the asset being held in trust
41
Q

What are collateralized mortgage obligations (CMOs)

A
  • investors are divided into tranches which determines which investors will receive principal repayment
  • interest form the pool of mortgages is distributed pro rata and the principal repayments are used to retire tranches sequentially
42
Q

Do short term or long term tranches in a CMO get principal first

A
  • short term tranche receive principal repayment first
43
Q

What risk are CMOs meant to mitigate against

A
  • prepayment risk associated with mortgage backed securities
44
Q

What is a debenture

A
  • are simply unsecured debt that is not backed by an asset
  • backed on the belief of the creditworthiness that the issuing company (or government) will repay the debt
45
Q

What are subordinate debentures

A
  • have a lower claim on assets than other unsecured debt
  • have more risk because of the lower claim on assets if the company defaults on the bond repayment
46
Q

What are income bonds

A
  • stipulate that interest is only paid when a specific level of income is attained
47
Q

What ratings agencies rate bonds

A
  • Moody’s
  • Standard and Poors
  • both rate on the company’s default risk and investment quality
48
Q

The higher the bond rating means the _____ the yield

A
  • the lower the yield
49
Q

What do bond rating agencies analyze

A
  • Liquidity
  • Total amount of debt
  • Earnings and stability of those earnings
50
Q

What are Moody’s ratings for investment grade bonds

A
  • Aaa - Baa are investment quality bonds
  • Ba and below are junk bonds
51
Q

What are Standard and Poor’s ratings for investment grade bonds

A
  • AAA - BBB are investment quality bonds
  • BB and below are junk bonds
52
Q

What are Guaranteed Investment Contract (GIC)

A
  • issued by insurance company’s 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
53
Q

What are the three types of municipal bonds

A
  • General obligations
  • Revenue bonds
  • Private activity bonds
54
Q

What is a general obligation bond

A
  • backed by the full faith, credit, and taxing authority of the municipality that issued the bond
55
Q

What is a revenue bond

A
  • not 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
56
Q

What are private activity bonds

A
  • used to finance construction of stadiums
57
Q

What companies insure municipal bonds

A
  • American Municipal Bond Assurance Corp (AMBAC)
  • Municipal Bond Insurance Association Corp (MBIA)
58
Q

What happens when an insured municipal bond is in default

A
  • the insurance company will pay the interest and principal amounts
59
Q

What risks do corporate bonds have

A
  • default risk
  • reinvestment rate risk
  • interest rate risk
  • purchasing power risk
60
Q

What risks do US government bonds have

A
  • reinvestment rate risk
  • interest rate risk
  • purchasing power risk
61
Q

How do you calculate the the tax equivalent yield for a triple tax free bond

A
  • add all of the tax rates together and use that as the marginal rate
62
Q

TEY = r / (1-t) What is r and what is t

A
  • r = tax exempt yield
  • t = marginal tax rate
63
Q

What is the formula for a double tax free bond if a client itemizes

A

Tax Exempt yield / (1 - (FT + ST(1 - FT))

  • FT = Federal tax rate
  • ST = State tax rate
64
Q

If the yield ratio is Rtf(Tax free) / Rt(Taxable) how does a higher ratio affect the attractiveness of a municipal bond

A
  • As the tax free return increases the ratio becomes bigger so the higher the ratio the better - the closer the tax free rate is to the taxable rate the investor will always choose the tax free rate

Investment Planning (8 decks)

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