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SIE > Ch 4 (Corporate and US Gov Debt) & Vocabulary > Flashcards

Ch 4 (Corporate and US Gov Debt) & Vocabulary Flashcards

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SIE Exam flashcards
1
Q

Indenture

A

The bond contract defining all important features of the bond (interest rate, maturity, callable/puttable, etc)

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2
Q

Trust Indenture

A

All corporate (non-exempt) issues of $50MM or more must have a Trust Indenture under the Trust Indenture Act of 1939

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3
Q

Types of Secured (Corporate) Bonds

A

Mortgage Bonds, Equipment Trust Certificate, Collateral Trust Certificate

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4
Q

Secured Bonds

A

Bonds that are backed by a tangible asset - if the issuer cannot make interest and/or principal payments, the underlying asset would be liquidated

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5
Q

Mortgage Bonds

A
  • Most common form of secured corporate debt
    *Backed by a lien on real estate/property
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6
Q

Commercial Paper (money market securities)

A
  • Very short maturities (14-90 days, 30 most common)
  • May be sold at a discount maturing at par
  • Sold in unit of $100,000 up to $1,000,000
    Purchasers are institutions with excess cash to invest
  • Limited trading as investors hold them to maturity
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7
Q

Debenture

A

Intermediate and long=term corporate debt backed solely by full faith and credit

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8
Q

Guaranteed Bonds

A

Typically issued by a subsidiary, with the corporate parent guaranteeing the interest and principal due
* These bonds take on the credit rating of the guarantor

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9
Q

Income/Adjustment Bonds

A
  • Issued when corporation enters bankruptcy - done to replace existing bonds
  • Only obligates issuer to pay if it has sufficient earning
  • Trade Flat
  • Not suitable for income seeking investors
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10
Q

Trade Flat

A

Without accrued interest
* Income Bonds
* Zero-Coupon Bonds

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11
Q

Arbitrage

A
  • When a trader buys the lower priced security and at the same time sells the higher priced security to lock in profit
  • Note the stock as to trade ABOVE PARITY for there to be an arbitrage opportunity
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12
Q

Conversion Ratio

A

= (Par Value of Bond) divided by (Conversion Price)

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13
Q

Parity Price of Bond

A

= (Conversion Ratio) times (Stock’s Market Price)

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14
Q

Parity Price of Stock

A

= (Bond Market Value) divided by (Conversion Ratio)

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15
Q

US Government Debt

A
  • Treasury Bills (short term)
  • Treasury Notes (intermediate)
  • Treasury Bonds (long-term)
  • Savings bonds are non-negotiable (cannot be traded)
  • US Government debt, including GNMA’s (Ginnie Mae Bonds) which are explicitly backed by the US Government, are considered (credit) risk-free
  • 100 minimum Par
  • Trades settle T+1
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16
Q

Government Sponsored Agencies

A
  • Implicitly backed by the US Government, so considered risk-free
    *Sallie Mae,
17
Q

Treasury Bills

A
  • Issued within 4/8/13/26/52 week maturities
  • Issued at a discount from par and mature at par (i.e. no interest)
  • Quoted on a discount yield basis
18
Q

Treasury Notes

A
  • Maturities range from 2 to 10 years
  • Pay interest semi-annually
  • Quoted in 32nds
19
Q

Interest Accrual

A
  • Corporate accrues interest on a 30 day per month basis (total of 360 per year)
  • Government accrues interest on an actual basis (total of 365 per year)
20
Q

Treasury Bonds

A
  • Matures in 10 to 30 years
  • Pay interest semi-annually
  • Quoted in 32nds
21
Q

STRIPS

A
  • Interest & Principal separated
  • Each interest payment and the principal is sold separately at a discount to par
  • Longer maturity = higher discount
  • For investors who wish to avoid reinvestment risk (because they are zero-coupon bonds)
22
Q

TIPS

A
  • Have a fixed interest rate over the life of the security
  • Every 6 months the principal is adjusted by an amount equal to the change in the consumer price index (CPI)
    -> receives a fixed interest rate semi-annually times the adjusted principal amount as an interest payment
  • These bonds are not subject to purchasing power risk
    -> if deflation decreases principal amount, bondholder still receives par at maturity
  • Lower interest rate because of the inflation protection
23
Q

Agency Securities

A
  • Federal Farm Credit System
    -> Offers farmers low-rate financing
    -> Issues discount notes, intermediate-term bonds, and long-term bonds
  • Mortgage-Backed Securities (MBS) issued by:
    -> Federal Home Loan Banks (FHLB)
    -> Federal National Mortgage Association - Fannie Mae (FNMA)
    -> Government National Mortgage Association - Ginnie Mae (GNMA)
    -> Federal Home Loan Mortgage Corporation - Freddie Mac (FMCC)
24
Q

Mortgage-Backed Pass Through Certificates

A
  • Issued by Fannie Mae, Freddie Mac, and Ginnie Mae, then passes through to investors the monthly mortgage payments made by homeowners
  • 25k is the minimum denomination
  • Investors are subject to prepayment risk
  • Offer monthly payments
  • Subject to pre-payment risk if interest rates fall
25
Q

Student Loan Marketing Association

A
  • Sallie Mae
  • Purchases insured student loans from lending institutions paying interest semi-annually backed by these loans
26
Q

Trading of Government/Agency Debt

A
  • Trading takes place over the counter (OTC), not on an exchange floor
  • Open Market operations through Repos and Revers Repos
27
Q

Repurchase Agreement (Repo)

A
  • Fed BUYS Treasuries
  • Used to inject cash in money supply, loosening credit
  • Interest rates go down as there is more money available to be borrowed
  • (They will probably sell them back the next day)
28
Q

Reverse Purchase Agreement (Reverse Repo)

A
  • Fed SELLS Treasuries
  • Used to take money out of the money supply, tightening credit
  • Interest rates go up as there is less money available to be borrowed
  • (They will probably buy them back the next day)
29
Q

US Government Agency Debt Tax Status

A
  • Interest received from US Government Bonds is subject to federal income tax, but exempt from state and local taxes
  • Interest received from investments in mortgage-backed pass-throughs is fully taxable
30
Q

Ginnie Mae

A
  • Government agency, does not issue securities (unlike Freddie Mac and Fannie Mae who are Government Sponsored Enterprises GSE’s)
  • Guarantees the timely payment and interest of certain MBS’s

SIE (4 decks)

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