Ch. 5 Flashcards by Adam Gravitt

Municipal bond interest is exempt from ____ tax.

Federal

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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

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What is a Grant Anticipation Note?

Municipal note issued in anticipation of receiving government funding in the form of a grant

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T/F: Asset backed securities typically offer higher yields?

True, since assets backing these bonds are riskier, the offer a higher rate of return

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What is a suitable investment for a client seeking monthly income?

A (Government National Mortgage Association) GNMA fund, since income is paid monthly

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Local general obligation bonds are backed by what type of tax?

Property tax

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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

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Is default possible on a municipal offering?

Yes; only US Government considered risk-free

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In a liquidation, place the following in priority: warrants, preferred shareholders, common shareholders

Preferred, common, warrants

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Is an income bond appropriate for a client who desires income?

No, income bonds will only pay interest if the issuer has sufficient income

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How is interest on corporate bonds treated for tax purposes?

Fully taxable at federal, state and local level

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A bond backed by machinery or rolling stock is called an ______

Equipment Trust Bond

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Though subject to federal tax, interest on Treasuries is exempt from

State and Local

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What is a guranteed bond?

A bond that is secured by another corporations guarantee that it will pay interest and principal

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The type of bond where bondholders have a lien on real property is called a _____

Mortgage bond

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May eurodollar bonds be issued in the US?

No and they are not registered with the SEC

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The maximum maturity of commercial paper is ____ days

270

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T/F: The interest rate on TIPS is fixed, but the principal may be adjusted

True

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What is a Bond Anticipation Note?

Municipal note for a capital project that will eventually be paid from proceeds of a long-term bond

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What system is used for the issuance of Treasury securities?

Auction

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What bond would be issued to build a factory for a private company?

Industrial Development Revenue (IDR) bond

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How often do GNMA pass-throughs make payments?

Monthly

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In a liquidation, place the following in priority: preferred shareholders, unsecured creditors, current wages

Current wages, unsecured creditors, preferred shareholders

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T/F: If revenue falls short, payments on moral obligation bonds only begin with legislative approval

True

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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