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CFP Exam > CFP - Bonds > Flashcards

CFP - Bonds Flashcards

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1
Q

Are US Treasury securities taxable?

A

NON-taxable at the state and local level

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2
Q

Series EE / Series E Bonds

Minimum purchase?

Annual maximum?

Face value?

Pay interest?

Redeemable?

A

$25 minimum purchase

$10,000 annual maximum

Offered at one-half face value

DO NOT pay interest, bond slowly increase in value over 20 years

NOT marketable/Non-transferable!!!!!!!!!!!!

Redeemable after 1 year with 3 month interest penalty if redeemed in less than 5 years

NOT taxed at the state or local level

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3
Q

Series HH / Series H Bonds

How often do they pay interest?

A

Pay interest semi-annually

*have not been issued since August 2004

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4
Q

Series I Bonds

Indexed against what?

Sold at what?

Interest consists of what?

A

Inflation indexed bonds

Sold at Face Value

No guaranteed return

NONMARKETABLE

Interest consists of what?
Fixed rate of return + inflation component

*Adjusted every six months

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5
Q

MARKETABLE US Treasury Bills

A

< 1 year

Sold at discount

No interest, just mature

Denominations of $100+

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6
Q

MARKETABLE US Treasury Notes

A

2-10 years

Interest paid semi-annually

Denominations of $100+

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7
Q

MARKETABLE US Treasury Bonds

A

> 10 years

Interest paid semi-annually

Denominations of $100+

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8
Q

Original Issue Discount (OID)

A

OID bond issued at a discount from Par Value

Ex: Zero coupon bond that is sold at a deep discount to par value

Bond increases in value over the term of the bond

Recognize income each year (even though not received)

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9
Q

Treasury Inflation Protected Securities (TIPS)

A

coupon rate does not change

rather it is adjusted annually for inflation by a factor

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10
Q

Separate Trading of Registered Interest and Principal Securities (STRIPS)

A

Coupon payment separated from the bond

low risk

highly liquid

specific time horizon

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11
Q

Name 2 types of bonds that mitigate against purchasing power risk?

A

I Bonds

TIPS

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12
Q

Federal Agency Securities…are they back by US government

A

NO, but they are a moral obligation

Exception: GMNAs

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13
Q

On-Budget types of Debt

A

GNMA
FHA

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14
Q

Off Budget Debt

A

FNMA (Fannie Mae)
FHLMC (Freddie Mac)
SLMA (Sallie Mae)
FFCB (Federal Farm)
FICB

FHLB

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15
Q

Types of Mortgage Backed Securities

A

GNMA (Ginnie Mae) (FHA/VA)

FNMA (Fannie Mae)

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16
Q

Biggest risk with Mortgage-backed securities?

A

Falling interest rates

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17
Q

What are MBSs backed by?

A

A pool of mortgages

Risk:prepayment

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18
Q

What are corporate Collateral Trust bonds?

A

Backed by an asset owned by the company issuing the bonds

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19
Q

What are CMOs?

A

Collateralized Mortgage Obligations

Short/Immediate/LT “tranches”

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20
Q

Types of Unsecured Corporate Bonds

A

Debentures (not back by asset)

Subordinated Debentures (lower claim on assets)

Income bonds

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21
Q

If a bond rating agency rates a bond high, what will happen to the yield?

A

Lowers the yield if rated high

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22
Q

GIC - Guaranteed Investment Contract

Issued by?

Return?

A

GIC - Guaranteed Investment Contract

Issued by? - Insurance Companies

Return? guaranteed rate

YIELD IS HIGHER THAN TREASURIES

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23
Q

Municipal bonds

Who issues?

Who taxes?

A

Who issues? STATE

Who taxes? NO ONE

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24
Q

MUNICIPAL BONDS: General Obligation Bonds

Who backs?

A

Backed by full, faith, and credit and taxing authority of municipality

BACKED BY TAXING AUTHORITY OF THE ISSUING MUNICIPALITY

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25
Q

MUNICIPAL BONDS: Revenue Bonds

Who backs?

A

Backed by the revenue of specific project

26
Q

MUNICIPAL BONDS: Private activity bonds are used to finance

A

Construction of stadiums

27
Q

MUNICIPAL BONDS: Insured Municipal Bonds

Companies that issue:

If insured bond is in default, what happens?

A

Companies that issue:
AMBAC
MBIA

If insured bond is in default, what happens?
THE INSURANCE COMPANY WILL PAY THE INTEREST AND PRINCIPAL AMOUNTS

28
Q

FIXED INCOME: Corporate Bonds

RISKS?

A

-Default

-Reinvestment

-Interest rate risk

-Purchasing Power Risk

29
Q

FIXED INCOME: US Government bond - RISKS?

A

-Reinvestment rate risk

-interest rate risk

-purchasing power risk

30
Q

Municipal Securities - Tax equivalent yield

A

Formula provided

rate they need to pay to be equivalent

31
Q

The lower the coupon the more

A

volatile the bond is.

32
Q

The lowest Bond rating for Moody’s and S&P that can still be considered investment grade?

A

Moody’s: Baa

S&P: BBB

33
Q

Coupon rate

A

Periodic interest received by a bond holder

Dollar amount (PMT on calculator)

Changes in the marketplace DO NOT EFFECT coupon payments

34
Q

Rising interest rates mean investors can get what on new bonds?

What happens to those selling bonds?

A

Larger stream of cash flow

Sellers must sell at a discount

35
Q

FALLing interest rates mean investors can get what on new bonds?

What happens to those selling bonds?

A

Coupon rates will fall

will be less than previous bonds

sellers can now sell at a premium

36
Q

YTM on a bond is

A

Essentially the compounded rate of return if an investor buys a bond today and holds to maturity

37
Q

YTC / Yield to call on a bond is

A

the compounded rate of return if an investor buys a bond today and the bond is CALLED by the issuer

38
Q

What happens to accrued interest when purchasing a bond?

A

The buyer pays the seller the interest that has accrued since the last payment

39
Q

Liquidity Preference Theory

A

Lower yields for shorter maturities because some investors prefer liquidity and are willing to pay for it

40
Q

Market Segmentation THeory

A

Distinct buyers and sellers at each given maturity

41
Q

Expectations Theory

A

The yield reflects investors inflation expectations

LT yields are usually higher

42
Q

When is a yield curve INVERTED?

A

Whenever inflation is expected to be lower in the future, the LT rates will be lower than ST rates

43
Q

Unbiased Expectations Theory

A

Holds that today’s longer term interest rates have imbedded in them expectations about ST rates

44
Q

Bond Duration

A

Weighted average maturity of all the cash flows

45
Q

The bigger the bond duration, the more

A

sensitive or volatile the bond is to interest rate changes

46
Q

Modified bond duration is

A

a bond’s price sensitivity to changes in interest rates

47
Q

A bond portfolio should have a duration equal to

A

the investor’s time horizon to be effectively immunized from interest rates

48
Q

A zero coupon bond will always have a duration

A

equal to its maturity

49
Q

Duration and term of bond have a direct/inverse relationship

A

DIRECT

50
Q

Duration is a measure of

A

how sensitive the bond is to changes in interest rates

51
Q

BOND STRATEGIES: Tax Swap

A

Involves selling a bond that has a gain and a bond that has a loss

(Offset each other)

Also involves selling a bond that has a loss position and buying a new bond.

52
Q

BOND STRATEGIES: Barbells

A

A barbell strategy involves owning both short-term and long-term bonds

53
Q

BOND STRATEGIES: Laddered Bonds

A

Requires purchasing bonds with varying maturities

54
Q

BOND STRATEGIES: Bullets

A

Very little payments during the interim period and then a lump-sum at some specified date in the future

*Zero-coupon bonds, treasuries, and corporates are most likely candidates since they pay little or no coupon during the period (payoff at some predetermined date in the future)

55
Q

What is the Convertible Bonds - Conversion Value?

A

The value of the convertible bond in terms of the stock which it can be converted

56
Q

Conversion Value Formula

A

Par / Conversion Price

x

Price of the Common Stock

57
Q

Property Valuation Formula / Capitalized Value

A

Net Operating Income /

Capitalization Rate

OR

NOI / Cost

58
Q

What does CONVEXITY MEASURE?

A

The difference between duration’s estimate of a bond’s price change and the actual price change of a bond.

59
Q

Lower coupon rate means what for volatility?

A

MORE VOLATILE

60
Q

The duration of a bond is a function of its:

A

-current price

-time to maturity

-YTM

-coupon rate

61
Q

To immunize a bond portfolio over a specific investment horizon, an investor would do what?

A

Match the average weighted duration of the bond portfolio to the investment horizon

CFP Exam (23 decks)

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