Chapter 2 Flashcards
Indenture
Terms of the loan for a debt security
Long-Term Debt
Money borrowed for a minimum of years
And Interest
A buyer pays a seller a bond’s market price plus any accrued interest since the last interest payment
Investment Grade Debt
Bonds rated in the top four categories (BBB or Baa and higher).
High Yield Bonds
Lower grade bonds. Known as junk bonds. Lower rate (BB or Ba and lower)
Pricing Corporate and Municipal Bonds
Each bond point (1% of $1000) represents $10, and fractions are in eights: each 1/8= $1.25.
Example: 90 1/4= 902.50
Pricing Treasury Securities
Each point is $10 and each .1 represents 1/32 of $10 ($.3125).
Example: 90.8 (or 90.08)= 902.50
Bond Listing Logic
DEF 5s35 @ 106= Issuer DEF, 5 is the coupon rate, 35 is maturity 2035 and 106 is price (1060)
Nominal Yield
Interest stated on the face of the bond (Coupon Rate)
Current Yield
Annual Coupon Amount/Market Price
T-Bills Issuance
Issued every week with maturities of 4, 13 and 26 weeks. Once every four weeks bills with 52 week maturity issued.
US Treasury Notes
Pay semi annual interest. Have intermediate maturities (2, 3, 5, 7 and 10 Years). Mature at par.
US Treasury Bonds
Pay semi annual interest. Have long term maturities (10-30 years). Mature are par.
Book Entry Form
Ownership is electronically in the books (All government issues are book entry).
Treasury Inflation- Protected Securities (TIPS)
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.
GNMA (Ginnie Mae) Securities
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.
Federal National Mortgage Association (Fannie Mae)
Purchases and sells real estate mortgages– primarily those insured by Federal Housing Administration (FHA) or Veterans Administration (VA).
Tennessee Valley Authority (TVA)
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”
Equipment Trust Certificates
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.
Collateral Trust Bonds (Also call Collateral Trust certificates)
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.
Debenture
Debt obligation of the corporation only backed by it’s word and creditworthiness.
Guaranteed Bonds
Bond guaranteed to pay interest, or both principal and interest, but a corporate entity other than the issuer.
Subordinated
Belonging to a lower of inferior class or rank; secondary. A claim that is junior to that of any other creditor
General Obligation Bond
Type of Municipal bond. Pledge of the issuer’s full faith and credit. Ad Valorem (property taxes) levied for payment.
Revenue Bonds
Type of Municipal Bond. Payable from earnings or a revenue producing enterprise, such as water, sewer, electric or gas system, toll bridge, airport, etc.
Tax Equivalent Yield (TEY) Formula
Municipal Bond coupon divide by (100%-Investor’s tax bracket)
Eurobond
Long term debt-instrument issued and sold outside the country of the currency in which it is denominated
Eurodollar Bond
Bond issued and sold outside the united states but for which the principal and interest are stated and paid in USD.
Yankee Bond
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)
Phantom Income
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.
Money Market
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.
Negotiable Certificates of Deposits (CDs)
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.
Commercial Paper
Short term unsecured paper issued by corporations. Zero coupon. Exempt from registration since maturity is less than 270 days.
London Interbank Offered Rate (LIBOR)
Worlds most widely used benchmark for short term interest rates. Likely to be replaced by Secured Overnight Financing Rate (SOFR) on 6/30/2023
Demand Deposit Account (DDA)
Legal term for a checking account. Now commonly includes savings accounts and money market accounts.
Certificates of Deposits (CDs)
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.
