Ch. 5 Flashcards
Municipal bond interest is exempt from ____ tax.
Federal
How does the dutch auction set the interest rate on Auction Rate securities?
It sets the lowest interest rate at which all the securities being offered will clear the market
What is a Grant Anticipation Note?
Municipal note issued in anticipation of receiving government funding in the form of a grant
T/F: Asset backed securities typically offer higher yields?
True, since assets backing these bonds are riskier, the offer a higher rate of return
What is a suitable investment for a client seeking monthly income?
A (Government National Mortgage Association) GNMA fund, since income is paid monthly
Local general obligation bonds are backed by what type of tax?
Property tax
For a treasury auction, what is the difference between a competitive bid and non-competitive bid?
Competitive bids indicate both quantity and price, while non-competitive bids indicate a quantity
Is default possible on a municipal offering?
Yes; only US Government considered risk-free
In a liquidation, place the following in priority: warrants, preferred shareholders, common shareholders
Preferred, common, warrants
Is an income bond appropriate for a client who desires income?
No, income bonds will only pay interest if the issuer has sufficient income
How is interest on corporate bonds treated for tax purposes?
Fully taxable at federal, state and local level
A bond backed by machinery or rolling stock is called an ______
Equipment Trust Bond
Though subject to federal tax, interest on Treasuries is exempt from
State and Local
What is a guranteed bond?
A bond that is secured by another corporations guarantee that it will pay interest and principal
The type of bond where bondholders have a lien on real property is called a _____
Mortgage bond
May eurodollar bonds be issued in the US?
No and they are not registered with the SEC
The maximum maturity of commercial paper is ____ days
270
T/F: The interest rate on TIPS is fixed, but the principal may be adjusted
True
What is a Bond Anticipation Note?
Municipal note for a capital project that will eventually be paid from proceeds of a long-term bond
What system is used for the issuance of Treasury securities?
Auction
What bond would be issued to build a factory for a private company?
Industrial Development Revenue (IDR) bond
How often do GNMA pass-throughs make payments?
Monthly
In a liquidation, place the following in priority: preferred shareholders, unsecured creditors, current wages
Current wages, unsecured creditors, preferred shareholders
T/F: If revenue falls short, payments on moral obligation bonds only begin with legislative approval
True
In a liquidation, place the following in priority: secured creditors, debentures, common shareholders
Secured creditors, debentures (unsecured creditors), common shareholders
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $_____
$100,000
What risk is primarily associated with Mortgage Backed Securities?
Prepayment risk
The type of bond that is backed by credit card receivables or home equity loans is called an
Asset-backed security
What are T-STRIPS?
Any treasury note/bond where a BD has stripped the interest and principal payments to sell separately as zero coupon bonds
T/F: The credit rating of an IDR is based on the credit of the municipality
False, it is based on the corporation
Money-market securities have a maturity of _____.
Less than 1 year
T/F: A T-Bill is a form of zero-coupon bond
True (<90 days, remember)
What are auction rate securities?
Long-term bonds (municipal or corporate) with a variable interest rate set through Dutch Auction
T/F: Collateral Trust Bonds are backed by the stock of the issuing corporation
False, stock pledged must be of ANOTHER company
How often do pass-through certificates make payments?
Monthly
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
What is often required before a revenue bond can be issued?
Conducting a feasibility study
In a _____ sale, an issuer invites underwriters to compete against one another by submitting bids for the issue
Competitive sale
List some short-term interest rates
Discount rate, federal funds rate, prime rate, LIBOR
What bonds are dollar denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee bonds
The minimum face value of a T-Bill, T-Note or T-Bond is $_____
$100
What is the liquidation order: IRS, unpaid workers, preferred shareholders, unsecured creditors, secured creditors, common shareholders
Unpaid workers, IRS, secured creditors, unsecured creditors, preferred shareholders, common shareholders
Revenue bonds are backed by _____ generated by _____
Specific revenue and generated by a project / facility
What is the dollar price of a T-Bond with a bid of 98-24 and par value of $100
98 + (24/32) = 98.75
T/F: Agency securities are typically AAA rated
True
Are debentures considered secured or unsecured?
Unsecured
What is a Tax Anticipation Note?
Municipal note issued in anticipation of future real estate taxes
General obligation (GO) bonds are backed by the issuer’s ______ and their ability to levy _____
full faith and credit and ability to levy taxes
May eurodollar bonds later trade in the US?
Yes
How is interest on municipal bonds treated for tax purposes?
Federally exempt but may be subject to state and local taxes
How often will Variable Rate Demand Obligation (VRDO)s adjust their interest rate?
At specified intervals such as daily, weekly or monthly
T/F: T-bills are quoted on a dollar basis
False, t-bills are quoted on a discount yield basis (basically zero coupon bond)
What are examples of marketable Treasury securities?
T-bills, T-notes, T-bonds, STRIPs
What is the maturity range of a T-bond?
More than 10 years
A bond backed by a charge to benefiting property owners is called as _____.
Special Assessment Bond
Standard and Poor’s (4) ratings for municipal notes are: ____, _____, _____ and _____
SP-1+, SP-1, SP-2, SP-3
Fixed income investors receive _____, while stockholders receive _____
Fixed income= interest
Stockholders= dividends
Moody’s rates municipal notes using ____, ____, ____ and ____
MIG1, MIG2, MIG3, SG
What is a specific risk that may be attributed to a GNMA fund?
Prepayment risk
What are the (2) general types of Treasuries?
1) Marketable (negotiable) and 2) Non-marketable (non-negotiable)
A competitive bid placed at a Treasury auction will indicate both ____ and ____
Quantity and price
The following would be a quote for what security? Bid 4.26, Ask 4.22
T-bill
A ______ is a revenue bond backed by one specific tax.
Special Tax Bond
T/F: All municipal bonds are exempt from federal taxes
False, certain ones are not tax exempt at federal level
T/F: Purchasers of new municipal bonds must receive a prospectus.
False, Municipal Bond investors receive an Official Statement, not a prospectus
Identify: GO
General Obligation
T/F: Marketable Treasury securities can be bought and sold between investors
True
What are the (2) methods by which municipal bonds are sold in the primary market?
1) Negotiated sale and 2) Competitive sale
List the government agencies that issue securities that are based on mortgages.
Government National Mortgage Association (GNMA); Federal National Mortgage Association (FNMA)
Why are Cash Management Bills (CMBs) issued?
To finance the government on a day-to-day basis
_____ is short-term, unsecured corporate debt which typically matures in 270 days or less
Commercial paper
Each payment from the Federal Home Loan Mortgage Corporation (FHLMC) will represent both ____ and ____.
Interest and principal
All winners of a Treasury auction will ultimately pay the ____ price of the ____ competitive tenders
lowest price of the accepted competitive tenders
The interest rate charged on overnight loans on a bank-to-bank basis is referred to as the ____ rate
Fed Funds
Will a bond’s conversion price or conversion ratio be adjusted for stock splits or stock dividends?
Yes, due to a bond’s non-dilutive feature
What does ownership of a GNMA pass-through certificate represent?
Interest in a pool of mortgages
By what types of taxes are general obligation bonds backed?
Income or sales tax and also licensing fees/fines
What security helps to finance foreign trade?
Banker’s Acceptance
What is the maturity range of a T-note?
2 - 10 years
T/F: long-term CDs are considered money-market instruments
False because CDs have a maturity greater than 1 year
List the types of secured corporate bonds
Equipment trust certificates, collateral trust bonds, and asset backed securities
T/F: When deflation occurs, the principal value of TIPS will decrease.
True
In a _____, a dealer sells bonds to another dealer and agrees to repurchase them at a specific time and price
Repo (repurchase agreement)
When analyzing GO bonds, what are some important considerations?
Property values, per capita income and debt, current debt, unfunded pension liabilities
T/F: An increase in unfunded pension liabilities is a negative sign of the municipalities creditworthiness.
True
What type of municipal bond is subject to a debt ceiling (limit)?
General obligation since they are paid using tax revenue
Describe a T-STRIP
A bond with greater than 1 year maturity with interest and principal payments stripped to make it a zero coupon bond
T/F: FNMA and FHLMC securities are backed by the full faith and credit of the US Government?
False, only GNMA bonds are backed by the full faith and credit of the US Government
____ is the mortgage-backed agency that is fully backed by US Government
GNMA- Government National Mortgage Association
At a Treasury auction, _____ bids are awarded first.
Non-competitive
What is a Revenue Anticipation Note?
Municipal note that will eventually be paid from future federal or state subsidies
What are the two main types of municipal bonds?
General obligation and revenue bonds
T/F: Interest paid on corporate bonds is entirely tax exempt
False, corporate bond interest is taxed at federal, state and local level
Name (2) types of money market instruments
T-bills and commercial paper
What price do non-competitive bidders agree to pay at the Treasury auction?
Lowest price of the accepted competitive bids
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks and railroad cars
Identify: BA
Banker’s Acceptance
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
T/F: Individual investors typically place competitive bids at a Treasury auction
False, individual investors place a non-competitive bid for quantity, not price
Describe an asset-backed security.
A security whose value and income are collateralized by a group of assets, usually bank receivables
______ bonds would usually require voter approval
General obligation
How is interest on Treasuries treated for tax purposes?
Exempt at state and local level but taxed at federal level
T/F: Agency CMOs have high credit ratings
True, due to the collateral backing them
In a _____ sale, an issuer selects the lead underwriter or senior manager that will sell the issue to the public
Negotiated sale
In a corporation, _____ stockholders have the most junior claim to assets.
Common
MIG stands for: _____
Moody’s Investment Grade
TIPS stands for: ____
Treasury Inflation Protection Securities
The principal value of TIPS may be adjusted based on changes to the ______
rate of inflation / Consumer Price Index
T/F: Interest paid on GNMA, FNMA, and FHLMC is subject to all federal, state and local taxes.
True
What are eurodollar bonds?
Dollar denominated bonds issued outside of the US
The most common security that issued by government agencies is a mortgage-backed _____ certificate
Pass-through
