Chapter 2

Question 1

Indenture

Answer 1

Terms of the loan for a debt security

Question 2

Long-Term Debt

Answer 2

Money borrowed for a minimum of years

Question 3

And Interest

Answer 3

A buyer pays a seller a bond’s market price plus any accrued interest since the last interest payment

Question 4

Investment Grade Debt

Answer 4

Bonds rated in the top four categories (BBB or Baa and higher).

Question 5

High Yield Bonds

Answer 5

Lower grade bonds. Known as junk bonds. Lower rate (BB or Ba and lower)

Question 6

Pricing Corporate and Municipal Bonds

Answer 6

Each bond point (1% of $1000) represents $10, and fractions are in eights: each 1/8= $1.25.

Example: 90 1/4= 902.50

Question 7

Pricing Treasury Securities

Answer 7

Each point is $10 and each .1 represents 1/32 of $10 ($.3125).

Example: 90.8 (or 90.08)= 902.50

Question 8

Bond Listing Logic

Answer 8

DEF 5s35 @ 106= Issuer DEF, 5 is the coupon rate, 35 is maturity 2035 and 106 is price (1060)

Question 9

Nominal Yield

Answer 9

Interest stated on the face of the bond (Coupon Rate)

Question 10

Current Yield

Answer 10

Annual Coupon Amount/Market Price

Question 11

T-Bills Issuance

Answer 11

Issued every week with maturities of 4, 13 and 26 weeks. Once every four weeks bills with 52 week maturity issued.

Question 12

US Treasury Notes

Answer 12

Pay semi annual interest. Have intermediate maturities (2, 3, 5, 7 and 10 Years). Mature at par.

Question 13

US Treasury Bonds

Answer 13

Pay semi annual interest. Have long term maturities (10-30 years). Mature are par.

Question 14

Book Entry Form

Answer 14

Ownership is electronically in the books (All government issues are book entry).

Question 15

Treasury Inflation- Protected Securities (TIPS)

Answer 15

Type of treasury issued with a fixed interest rate, but the principal amount is adjusted semi-annually by an amount equal to the change in CPI (Consumer Price index). Interest payments semi-annually.

Question 16

GNMA (Ginnie Mae) Securities

Answer 16

Guaranteed by the full faith and credit of US government. Represent an interest in pools of FHA-Insured mortgages. The portion of each monthly payment representing interest is subject to state, local and federal income taxes.

Question 17

Federal National Mortgage Association (Fannie Mae)

Answer 17

Purchases and sells real estate mortgages– primarily those insured by Federal Housing Administration (FHA) or Veterans Administration (VA).

Question 18

Tennessee Valley Authority (TVA)

Answer 18

The nation’s largest power provider and corporation of the US government. Not backed by US government, but backed by the agencies’ projects. However, credit rating agencies perceive there is an “Implicit government guarantee of TVA bonds”

Question 19

Equipment Trust Certificates

Answer 19

Corporations, particularly railroads and airline companies, finance the acquisition of their rolling stock, locomotives, or airplanes by issuing equipment trust certificates. Equipment used as collateral.

Question 20

Collateral Trust Bonds (Also call Collateral Trust certificates)

Answer 20

Borrows money and deposits securities to a trust for collateral. The better the quality of the securities deposited, the better the rating of the bond.

Question 21

Debenture

Answer 21

Debt obligation of the corporation only backed by it’s word and creditworthiness.

Question 22

Guaranteed Bonds

Answer 22

Bond guaranteed to pay interest, or both principal and interest, but a corporate entity other than the issuer.

Question 23

Subordinated

Answer 23

Belonging to a lower of inferior class or rank; secondary. A claim that is junior to that of any other creditor

Question 24

General Obligation Bond

Answer 24

Type of Municipal bond. Pledge of the issuer’s full faith and credit. Ad Valorem (property taxes) levied for payment.

Question 25

Revenue Bonds

Answer 25

Type of Municipal Bond. Payable from earnings or a revenue producing enterprise, such as water, sewer, electric or gas system, toll bridge, airport, etc.

Question 26

Tax Equivalent Yield (TEY) Formula

Answer 26

Municipal Bond coupon divide by (100%-Investor’s tax bracket)

Question 27

Eurobond

Answer 27

Long term debt-instrument issued and sold outside the country of the currency in which it is denominated

Question 28

Eurodollar Bond

Answer 28

Bond issued and sold outside the united states but for which the principal and interest are stated and paid in USD.

Question 29

Yankee Bond

Answer 29

US dollar denominated bond issued by a non US entity in the US market (Maple Bond is a Canadian dollar denominated bon issued by a non Canadian entity in Canadian market)

Question 30

Phantom Income

Answer 30

Related to zero coupon bonds– IRS requires issuer to send a form 1099-OID indicating taxable interest to be reported each year. Referred to as phantom income since you don’t see it, but pay tax on it.

Question 31

Money Market

Answer 31

Market for buying and selling short-term loanable funds in the form of securities and loans. Maturity dates of one year or less, and issued at a discount.

Question 32

Negotiable Certificates of Deposits (CDs)

Answer 32

Unsecured time deposits. Issued at par. Bank that issues the CD redeems the CD at face value plus interest. Negotiable CDs can be referred to as Jumbo CDs– they pay interest semi-annually. FDIC insurance applies up to 250K. No pre-payment penalty.

Question 33

Commercial Paper

Answer 33

Short term unsecured paper issued by corporations. Zero coupon. Exempt from registration since maturity is less than 270 days.

Question 34

London Interbank Offered Rate (LIBOR)

Answer 34

Worlds most widely used benchmark for short term interest rates. Likely to be replaced by Secured Overnight Financing Rate (SOFR) on 6/30/2023

Question 35

Demand Deposit Account (DDA)

Answer 35

Legal term for a checking account. Now commonly includes savings accounts and money market accounts.

Question 36

Certificates of Deposits (CDs)

Answer 36

Nonnegotiable (cannot sell to anyone-can only be redeemed at the bank). Deposits as little as $500 and maturities anywhere from three months to five years. Withdrawal prior to maturity usually results in penalties.