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SIE Study Prep > Chapter 2- Debt Securities > Flashcards

Chapter 2- Debt Securities Flashcards

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1
Q

Bonds are…

A

Loans (represent a debt obligation of the issuing organization)

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2
Q

Bonds Trade at…In the secondary market (3 levels)

A

A discount… market price is less than par value

Par…market price equals par value

A Premium…market price is greater than par value

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3
Q

A Coupon Rate/Coupon is…

A

The fixed interest rate of the bond

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4
Q

Interest on bonds is paid…

A

Semi-Annually

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5
Q

Par Value of a bond is

A

1000 dollars

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6
Q

One Point on a Corporate Bond is..

A

$10

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7
Q

Maturity Date on Bond

A

The date the bond is due for repayment to the investor

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8
Q

Series Bonds

A

Have different issue dates and usually have the same maturity date

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9
Q

Term Bonds

A

Entire issue of bonds will have the same maturity date

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10
Q

Sinking Fund (Definition, Uses)

A

Money set aside to redeem the company’s bonds or debentures

Frequently used on bond issues where a large amount of money is gonna be due at once and can also be used for Preferred Stocks

(May be a mandatory debt retirement provision of a bond indenture)

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11
Q

Indentures

A

Rules associated with a particular bond

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12
Q

How does sinking find provision effect a bond

A

Increases Safety on bond but can decrease the yield of the bond

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13
Q

Serial Bonds

A

Issue of bonds that have one issue date and staggered maturity dates…scheduled at regular intervals until the issue is paid in full

(This causes interest costs to issuer to go down progressively over the life of the bond)

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14
Q

Balloon Maturity

A

Bonds with a large amount of the issue that comes due at or near the final maturity date

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15
Q

Funded Debt (Does not include)

A

Corporate debt that Is due more than one year from the issue date and includes corporate bonds, notes and
bank loans

Does not include (preferred stock, government bonds, or municipal bonds)

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16
Q

Registered Form of Bond

A

Bonds are registered in investors name and interest payments are sent directly to investors through corporations paying agent

  1. All bonds are currently issued as this
  2. Principal is sent directly to owner at maturity
  3. To sell investor must sign the back of the registered certificate and deliver it to the broker-dealer
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17
Q

Bearer Form of Bond

A

Not registered in the investors name and have interest coupons attached

  1. Bonds are no longer issued in this form
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18
Q

Bonds with physical Coupons attached must be redeemed for interest
by…

A

Clipping coupons and presenting them to an authorized paying agent (usually a bank)

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19
Q

Registered “as to Principal Only” form of bond

A

Registered in the investors name with interest coupons attached

  1. No longer issued in this form
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20
Q

Book Entry Form of a Bond

A

Ownership is represented electronically (no physical certificate needed)

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21
Q

Most Bonds Today are in what form

A
  1. Registered on Book Entry Form (in investors name electronically)
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22
Q

Bond Rating Companies

A

Standard and Poors, Moody’s, and Fitch

NOT AM best they do insurance

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23
Q

Bond Ratings

A 
(Investment Grade)- conservative investors seek 
AAA
AA
A
BBB
(Speculative Grade) - bonds or issuer are questionable 
BB
B
CCC
CC
C
DDD
DD

Investment= Reputation for paying back interest and principal

Speculative= questions as to whether principal is paid back or interest is on time (high yield bonds, junk bonds)

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24
Q

Three Basic Categories of Bonds

A
  1. Corporate
  2. Government
  3. Muncipal
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25
Q

Yield of a Bond or (Yield to Maturity)

What does it take into account?

A

Actual rate of return an investor receives based on the price paid for the bond

Takes into account…purchase price, interest payments, and redemption value of bond

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26
Q

Bonds Purchased at a Discount (YTM Effect) (Yield)

A

Yield > Coupon Rate

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27
Q

Bonds Purchased on Par (effect on YTM)(Yield)

A

Yield = Coupon Rate

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28
Q

Bonds Purchased at a Premium (effect on YTM)(Yield)

A

Yield < Coupon Rate

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29
Q

Risk Effect on Yields for Types of Bonds

A

Higher Risk = Higher Yields

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30
Q

If a quotation is a % it represents…

A

Yield To Maturity quote style (YTM)

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31
Q

Key Differences in Types of Bonds (refer to chart in images) (reference flash card)

A

Go through a couple times

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32
Q

How much do you get @ maturity on a bond

A

Par Value no matter how much you paid!!

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33
Q

What is hearing just “yield” a reference to

A

Yield To Maturity or Basis

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34
Q

What is Yield To Maturity used interchangeably with

A

Basis

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35
Q

Nominal Yield

A

Coupon rate or interest rate of the bond

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36
Q

Current Yield (and formula)

A

Actual income the investor will receive (snapshot)

OR

Annual Interest Payout/ Market Price = Current Yield on bonds

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37
Q

Yield To Maturity (Basis)

A

Long term yield on a bond that is expressed as an annual rate (big picture) (considers time remaining till maturity)

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38
Q

Biggest difference between YTM and Current Yield

A

YTM considers time remaining until maturity and current yield does not

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39
Q

What is the market price decrease effect in YTM

A

Increases b/c what you put in your pocket over the long term is going up as the price of a bond goes down

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40
Q

What is the effect of a market price increase on YTM

A

Yield To Maturity goes down (as you pay more for the bond the less you put in your pocket)

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41
Q

What type of security are bonds and preferred stock?

A

Fixed Income Securities

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42
Q

What happens to market price of a preferred stock or bond when interest rate increases?

Decreases?

A

It moves in the opposite direction

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43
Q

Changes in Yields are measured in?

And that is equal to…

A

Basis Points

Equal to 1/100th of a point (.01% of the 1000 par value)

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44
Q

Change of 1% in Yield is equal to __ basis points

A

100 basis points

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45
Q

Bonds trading at a discount will always have a basis that is ____ than the coupon rate

(Think Inverse Seesaw)

A

Higher

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46
Q

Bonds trading at a premium will always have a ____ Basis (YTM) than the coupon rate

(Think Inverse Seesaw)

A

Lower

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47
Q

Bonds trading at par will always have a Basis (YTM) that is ____ as the coupon rate

A

The same

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48
Q

Short Term Bond Relationship with Interest Rate Changes

A

Quickest Reaction (reacts the quickest to interest rate changes)

Due to less interests payment until bond maturity

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49
Q

Long Term Bond Relationship with interest Rate Changes

A

Greatest Reaction (Reacts the greatest to interest rate changes)

Due to more interest payments until bond is matured

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50
Q

Risk Comparison of Long Term and Short Term bonds

A

Short Term bonds are considered to be safer and more stable of an investment

While

Long Term bonds carry more risk than short term bonds

(Due to the length of time it’s effected by interest rate changes and other things)

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51
Q

Duration when it comes do bonds is…

What does a “duration of 5 mean”?

A

A measure of the sensitivity of a bonds market price to changes in interest rates

Bond with a duration of 5 will have a price movement of 5% for every 1% of movement in interest rate

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52
Q

I’m bond trading “M” means…

5M meaning?

A

“M” is the Roman number for 1,000 and is used to signify the dollar value of a quantity of bonds

5M= $5,000 worth of bonds

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53
Q

Corporate Bonds are…

A

An instrument of debt issued by a corporation (bond issued by a corporation)

Does not make bondholders equity owners

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54
Q

Tax on corporate bonds

A

Fully taxable at the federal, state, and local level

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55
Q

Most Corporate Bonds are traded

A

Over the Counter as a dealer/principal transaction

(OTC means not being traded on the physical exchange floor)

(dealer principal means the dealer works into and out of their own inventory not act as a middle man)

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56
Q

Corporate Bonds are quoted in…

A

Points and 1/8ths of points as a % of Par

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57
Q

Dollar Value Of A Corporate Bond Is

Formula

A

Quoted Price X $10

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58
Q

A Leveraged Buy-Out is…

A

The takeover of a company using borrowed funds

Generally the assets of the target company are used as a security for the loans

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59
Q

A “Spin-Off” is…

A

A corporate divestiture that results in the subsidiary of a company becoming an independent company operating on its own

(Subsidiary to independent)

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60
Q

A Holding Company is…

A

A corporation that owns enough of the voting shares of another corporation that it can influence that companies:

  1. Policies
  2. Management
  3. Board Of Directors
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61
Q

Trust Indenture Act Of 1939

What must the issuer do under this act?? (Who does it protect)

A

Requires that Corporate bonds and debentures be issued under an “indenture” or “deed of trust”

(This indenture specifies the rights and duties of the issuer, underwriter, and investor)

Under this act… issuer is required to appoint a trustee who will represent and protect the BOND HOLDERS and their interests

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62
Q

The Trust Indenture Act of 1939 does not regulate

A
  1. Federal Government Issues
  2. Municipal Issues
  3. Private Placements
  4. Unit Investment Trusts (UITs)
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63
Q

What is a secured bond?

A

Bonds that are more conservative investments…that are secured by a guarantee or collateral

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64
Q

Types Of Secured Bonds (5)

A 
Mortgage Bond
Equipment Trust Certificate
Collateral Trust Certificate
Guaranteed Bonds
Parity Bonds
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65
Q

Mortgage Bond

Closed-End, Open-End, General

A

Bond (instrument of debt) secured by a mortgage on the real property (and sometimes even the underlying property) owned by the issuing corporation

(Largest type of secured securities)

Closed-End = property used to secure the loan can not be used as collateral for future loans unless lesser in claim

Open-End = Property used to secure the loan can be used as collateral for future loans and all debts hold equal claims against assets (creates more risk and higher yield)

General = names all mortgageable properties as collateral guy does not name any specific lots

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66
Q

Equipment Trust Certificate

(What are they secured by?)

(what happens to the title?)

(What happens in default)

A

Instruments of debt (bonds) issued by transportation companies to purchase new equipment

Secured by the new equipment (rolling stock of the issuing corporation such as railroad cars, shipping containers, and trucks)

Title is held by Trustees until the bonds are completely paid at maturity

In default bondholders have first rights to titles of equipment

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67
Q

Characteristics of Equipment Trust Certificates (3)

A
  1. Usually Not Callable
  2. Issued in Serial Form
  3. Rarely ever default (b/c defaulting would cause them to lose equipment they need to operate)
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68
Q

Collateral Trust Certificate (what is securing)

(Where are they placed)

(Generally used by/for)

A

An instrument of debt issued by a company that uses securities (stocks/bonds) of OTHER corporations that the issuer owns as collateral

Securities used are placed on deposit with a trustee

Generally issued by parent corporations that use the securities of a wholly owned subsidiary as collateral

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69
Q

Guaranteed Bonds

Most common example

A

Bonds guaranteed by a company other than the issuing company

A parent company might guarantee the debt of a subsidiary company

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70
Q

Parity Bonds

A

Bonds issued that have equal claim or rights as other bonds which were previously issued (Open-End Mortgage Bond is an example)

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71
Q

Debenture & Subordinated Debenture

What’s kinda of debt are they

A

An instrument of debt backed by the “good faith and credit” of the issuing corporation only

Subordinated Debenture is a debenture bond which holds a lesser or “junior” claim than other debenture bonds…therefore they would be paid only after higher level debenture claims have been satisfied

(Unsecured Debt!!)

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72
Q

Income, Junk, and Fallen Angel bonds are considered ____ investments and why?

A

Risky Investments because they represent the lack of a solid credit record or the financial distress of the issuer

(Therefore they generally offer a higher coupon rate)

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73
Q

Higher Coupon Rates on bonds are generally related to…

A

Less safety or more risk

The opposite is true of Lower coupon rates to more safety and less risk

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74
Q

Junk Bonds/ High-Yield Bonds

What range are they rated in?

Volatility and Yield comparison to the other range of bonds?

Used to finance what on occasion?

A

Issued by companies without a long track record of sales and earnings OR companies with questionable credit strength

Bonds Rated in Speculative Rating (BB or lower OR not rated at all)

(Investors prefer “high yield” to “Junk” (High Yield, Higher Coupon Rate))

More Volatile with Higher Yields than investment grade

Sometimes used to finance corporate takeovers

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75
Q

Fallen Angels

A

Bonds that were once issued as “investment grade” but have been downgraded to a “speculative grade” rating such as a “Junk Bond”

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76
Q

Yields & Market Prices comparison for High Quality and Low Quality Bonds

A

High Quality = Lower Yields, Higher Market Price

Low Quality = Higher Yields, Lower Market Price

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77
Q

Income Or Adjustment Bonds

What is their promise?

Characteristics….

A

Often issued by companies in financial difficulty trying to avoid bankruptcy (riskiest type of corporate bond)

Promise to Pay interest ONLY with sufficient earnings and if the board of directors declares interest will be paid.

…Principal is still due at maturity
…these bonds trade “flat” meaning without accrued interest
…called adjustment bonds when used for corporate reorganization
…considered risky (the riskiest corporate bond)

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78
Q

Zero-Coupon Bonds

A

Bonds sold at a deep discounts and pay NO interest while the bonds are outstanding

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79
Q

Zero Coupon Bonds do not pay semi annual interest therefore…

A

They do not have “accrued interest” which would be paid out at the time the bond was purchased or sold

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80
Q

The discount of a Zero Coupon Bond is representative of…

A

The amount of interest that the bond would pay (no interest is paid during the life)

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81
Q

Accretion represents…

A

The amount of “imputed interest” or “implied interest” which has accumulated on a bond purchased at a discount

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82
Q

To Calculate Accretion one would use…

4 yes and 1 no

A

Purchase Date
Purchase price
Dated Date (the date for a new bond issue from which interest accrues)
Maturity Date

DOES NOT use current market value of the zero coupon bond (current market value is a reflection of market conditions and not gonna be a direct reflection of amount of accretion)

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83
Q

Zero Coupon Pays ____ at maturity?

What does payment include?

A

One Lump Sum

Including investors Initial Investment plus imputed interest (interest that has accreted)

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84
Q

What does “Phantom Income” mean when it comes to Zero-Coupon Bonds

A

Bondholders are taxed annually based on the increased value of the security (even though they have received no actual income)

Ex. Bought a zero coupon bond at 750 and it matures after 5 years at 1000….you are taxed annually on the 250 as it represents the interest that will be paid out over the 5 year period

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85
Q

Purpose of a Zero Coupon Bond…

A

Purchased by investors seeking accumulation of capital often for an upcoming project or goal

Ex. Parent with a child going to college in 5 years from now so you purchase a zero coupon bond with a 5 year maturity

86
Q

What causes the high volatility of the market price of Zero Coupon bonds?

(3 things)

What does this mean for interest rate effect?

A
  1. Issued at a discount
  2. Do not pay interest semi-annually
  3. Accrete Value from imputed interest (not paid until maturity)

Interest rates effect zero coupon bonds more than regular interest or coupon bearing bonds

87
Q

Why do interest or coupon bearing bonds offer more price stability than zero coupon bonds?

A
  1. Issued at or near par value
  2. Pay interest semi annually
  3. Market value does not reflect any imputed interest or accrued interest
88
Q

Quote for a Zero-Coupon bond

What does “ABC zr 27” mean?

A

“ZR” in the quote

Zero coupon bond is generally identified with “zr”

ABC zero-coupon bond maturing in 2027

89
Q

Callable Bonds

A

Bonds that can be “called” at the option of the issuer at a specified premium price after a specified date

90
Q

What specifies the callable date and the price at which the bond will be called?

A

The “Call Provision”

91
Q

Call Protection is..

What do bondholders want for interest rates and market price during this time?

A

The fixed time period where bonds may not be called by the issuer

Bondholders want interest rates to decline during this period AND prices to rise during this period

92
Q

How does coupon rate of a bond effect the chance of it being called?

Why?

A

The higher the coupon rate the greater the chance the issuer will call the bond

the issuer can retire the higher interest bond with a new bond at a lower rate

93
Q

Calling a bond is similar to…

Think house debt and car debt

A

Refinancing a house or a car loan to replace the current interest rate with a lower one

94
Q

Bonds and Preferred stock may be ____ but common stock is never ____

A

Callable

95
Q

Bondholder receives what when bonds are called?

What is the effect of this on the companies credit worthiness and it’s debt to net worth ratio?

A

“Call Premium” PLUS the accrued interest

Credit worthiness improves (less debt)
Debt the net worth ratio improves (decreases)

96
Q

After “Notice of Call” but before the call is date investors may…

(What option do investors typically choose?)

A

Convert the bonds (if convertible)
Sell the bonds
Wait for the redemption date

(The option that puts the most money in their pocket)

97
Q

Callable Bonds will usually trade at a lower price because…

A

Call features are undesirable to investors

98
Q

How are bonds called in on a “partial call”?

A

On a random basis

99
Q

Convertible Bonds

A

Bonds that can convert into shares of stock at the option of the bondholder

100
Q

When would converting a convertible corporate bond into common stock be considered a taxable event??

A

When the stock is sold

101
Q

More Options for the investor does what to price and/or coupon rate

A

Pay a higher price or accept a lower coupon rate (fixed interest rate)

102
Q

Conversion Price is…

What does it tell you?

A

The specified rate bonds are converted at

Tells you how many shares of common stock the investor would receive upon conversion

103
Q

Formula for shares upon bond conversion is…

A

(Par Value/Conversion Px) = Common Shares Received

104
Q

Coupon Rate of a convertible bond is usually ____ than in non convertible bonds of the same quality

A

Lower (More Choice/Options)

105
Q

Convertible Securities typically have a _____ volatile market value than non-convertible securities

Why?

A

More

B/c the value is tied more closely to the market value of common shares which fluctuate more than preferred stock values

106
Q

Refunding Bonds (goes hand and hand with callable bonds but not always)

A

The sale of a new issue of bonds (at a lower issue rate) and the proceeds of it go to retire an outstanding issue (which is at a higher interest rate)

Therefore it’s generally done when there is a sharp decline in interest rates

107
Q

What is a CMO or Collateralized Mortgage Obligation?

A

A bond that is secured by a pool of mortgage loans (mortgage backed security)

108
Q

CMOs provide a secure income on a ____ basis

A

Monthly

109
Q

The Principal of a CMO is paid back in…

A

Varying amounts/degrees over the life of the CMO

110
Q

Interest in a mortgage is typically ____ loaded…what does this mean?

A

Front

You pay a lot more interest at the beginning of a mortgage than at the end

111
Q

CMOs are considered ____ securities and why?

A

Derivative Securities….because the cash flow of the CMO is dependent on the performance of a pool of mortgages

112
Q

Issuers of CMOs

(Who ISNT an issuer)??

A

Ginnie Mae
Fannie Mae
Freddie Mac

FHA Mortgage Loans

Conventional/Private Mortgage Issuers

(Sallie Mae)

113
Q

Planned Amortization Class (PAC) is

A

PACs are CMOs which most resemble bonds because they have a sinking fund structure

Meaning investors will receive payments over a predetermined period with stable cash flow

PACs have companion bonds or (non pac bonds) which bear the risk

Less than average exposure to call risk

114
Q

Pro-Rata means…

A

Divided according to an exact formula

115
Q

CMO tranches generally pay investors ____

A

Monthly

116
Q

Interest payments from a CMO are subject to ____ income tax

And how is it allocated to each tranche?

A

Federal, State, and Local income tax

Pro-Rata

117
Q

Tranches are paid off ___ at a time in order of ____?

A

One

Maturity

118
Q

A Z-Bond (Accrual Bond, Accretion Bond) is…

When do they revive cash?

A

The final tranche of a CMO

After other tranches are paid in full

119
Q

CMO tranches with a variable rate of interest are usually measured to the ____

A

LIBOR (London Interbank Offered Rates)

120
Q

CMOs trade ____ with ____ and ____?

A

Over the Counter

With Mark Ups

And Mark Downs

121
Q

Credit Risk of CMO

A

Little or none…most are guaranteed by US government sponsored enterprises or agencies or have carried AAA ratings

(Riskier than Treasury Securities)

122
Q

Interest Rate and Market Risk of a CMO

Decline/Increase of Rate

A

If rates decline, CMO prices will increase, mortgages will be refinanced and prepayment will occur

If rates rise, mortgages are typically held through maturity and lower rate CMOs may be less desirable than newer, higher rate CMOs

123
Q

Implied Call Risk (Prepayment Risk) of CMO

A

The risk that principal will be returned sooner than originally anticipated

Caused by:

Sharp Interest Rate declines and increases in refinancing activities

Also may occur if mortgage holders pay off their loans ahead of schedule

124
Q

Extension Risk of CMO

A

The risk that the maturity on the CMOs may be extended or end up longer than expected

125
Q

Advertisements of CMOs must not contain ____ between CMOs and any other investments including CDs

A

Comparisons

126
Q

Advertisements must prominently display ____

A

The final maturity date of the security

127
Q

Advertisements must include a description of ___

A

The initial issue tranche

128
Q

Agency CMOs are…

A

Securities guaranteed and/or issued by Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA)

Guarantees associated with agencies enhance the credit quality of CMOs

Ginnie Mae pass-through securities are comprised of FHA and VA mortgages that are guaranteed against default

129
Q

Private CMOs are…

Who are they backed by?

A

Securities issued by private institutions (such as banks, investment banks, and home builders)

Backed only by the issuer of the product, not but any government guarantee (private label CMOs)

(Ratings based on collateral and issuer)

130
Q

Collateralized Debt Obligations (CDO) are…

A

A structure debt security backed by a pool of assets (ABS) including mortgages, auto loans, corporate debt, and credit card debt

ABS= Asset Backed Security

(Tranches like a CMO but divided based on risk generally)

131
Q

Treasury Bills (T-Bills) are… (usual max time)

A

Direct Short Term Debt obligations of the federal government (not longer than a year)

132
Q

T-Bills are referred to as a ___ free investment and are Highly ____

A

Risk Free

Marketable

133
Q

Treasury Bills are sold at a ____ at competitive bid ____ and redeemed at ____ on maturity

A

Discount

Auction

Par

134
Q

Marketable but not redeemable means?

What can and can’t you do

A

You can sell the treasury bill on the secondary market but nobody can go to US government and redeem for face value

135
Q

What are the available maturities for T-Bills? (5 different times)

(Can be listed in what instead)

A

1 month, 2 Month, 3 Month, 6 month and 12 month

Can be listed in weeks too

136
Q

T-Bills offer the investor an ____ liquid investment of the ___ quality

A

Extremely

Highest

(US GOV can print more money if they need to)

137
Q

Long term policy of investing in T-Bills long term would result in a ____ principal and a ____ fluctuating rate of return

A

Stable

Fluctuating

138
Q

Return earned on ALL U.S. government securities is exempt from ____ and ____ income taxes but subject to ____ income taxes

A

State

Local

Federal

139
Q

T-Bills are issued with a minimum denomination of ____

A

$100

140
Q

T-bills are _____ callable prior to maturity and do not carry a ___ rate of interest

A

Not

Fixed

141
Q

T-bill discounts are taxed as _____ to investors and NOT as a ____

T-Bills are quoted on a yield basis which means?

A

Interest Income, Capitol Gains

The discount from par

142
Q

Treasury Notes, Bonds, and Tips are issued in minimum denominations of…

A

$100

143
Q

Treasury Notes, Bonds, and TIPs pay a ____ rate of interest semi-annually which is only exempt to ____ income tax

A

Fixed Rate

Federal

144
Q

For Treasury Notes, Bonds, and TIPs…Regular way settlement is ____ in the secondary market. Regular way settlement is ____ in the Primary Auction Market

A

T+1

T+3

145
Q

Treasury Notes have maturities of ___ to ____ years and are ____ issued as callable

A

2-10

Not issued as callable

146
Q

Treasury Bonds have maturities of ____ to ____ years and ____ be issued as callable

A

10-30 years

May be callable

147
Q

A point on a treasury note or bond is equal to ____ and fractions of points are quoted in ____

A

$10

32nds

148
Q

TIPs (Treasury Inflation-Protected Securities)

A

Bonds who’s interest and redemption payments are indexed to the current inflation rate based on the CPI

149
Q

Fixed Rate of a TIP is not applied to the par of 1000 but to ____

A

The inflation-adjusted principle value of the bond

150
Q

Principal for a TIP is adjusted to CPI _____

A

Semi-Annually

151
Q

Final Payment on a TIP can’t be ___ than the investor originally paid

A

Less than (no deflation)

152
Q

Appreciation on the principle value of the TIP must be reported ____

A

Annually

153
Q

TIPS are auctioned in ____, ______, ______

A

July, October, and January

154
Q

STRIPS (Separate Trading of Registered Interest and Principal Securities) or Treasury Receipts or Zero Coupon Treasury Bonds or Stripped Treasuries

A

Offer investors the ability to purchase certificates which represent a portion of a trust with treasury bonds as the underlying security

(Trust buys a large quantity of treasury bonds, strips the coupons and then offers certificates or receipts with varied maturities to investors)

155
Q

Treasury Receipts are _____ treasury bonds

A

Stripped Coupon

156
Q

STRIPS trade at ____ which are accreted and taxed annually and are very volatile

A

Deep Discounts

157
Q

All interest on STRIPS is paid ____

A

At maturity

158
Q

Purchasers are able to lock in a rate of return for a pre-determined period (Example of this)

A

A 20 year US treasury bond is transformed into…

40 semi-annual interest payments
And the final principal payment

Therefore 41 separate Zero Coupon treasury receipts are created

159
Q

Interest and Principal payments on the stripped bonds are ____ by the US Treasury and therefore are of the highest quality

A

Guaranteed

160
Q

Interest on Treasury Receipts is taxable ____ on accrual even though the investor receives only one payment at maturity

A

Annually

161
Q

Individuals normally purchase treasury receipts for retirement plans such as ____ and ____ that have no current tax liability

A

IRA’s and Keoghs

162
Q

Regular Way settlement for US Government Securities in the secondary market is and payment is normally required in ____

A

T+1 (business day after trade date)

Federal Funds

163
Q

Series EE Savings Bonds

A

Non-Marketable Federal Government debt (can not be traded in secondary market)

164
Q

Series EE Savings Bonds are issued at ____ and earn interest. Interest received is taxed when the bonds are ____. They are offered in denominations of ____ to ____ (max per calendar year limit)

A

Face Value

Redeemed

$25 to $10,000

165
Q

Series EE Savings Bonds are ____ registered in the investors name. They are ____ (must be redeemed back to government) and ___ subject to market fluctuations (no secondary market)

A

Electronically

Non-Marketable

Not

166
Q

Series EE Savings Bonds are ____ prior to maturity after one year and are ____ eligible to be used as collateral for a loan because they are not marketable

A

Redeemable

Not

167
Q

Fannie MAE (FNMA), Freddie Mac (FHLMC), and Ginnie MAE (GNMA) are government sponsored corporations that profile financing for the housing market

They….

A

Buy Mortgages from lenders

Put the mortgages into pools

Offer Securities to the public which are backed by the mortgages in the pool

168
Q

Agency and Sponsored Issues are considered ____ risk investments. And outstanding shares are available in ____ form or ____ form with interest coupons attached.

New issues of these issues are not available in ____ form

A

Low Risk

Registered Form

Bearer Form

Bearer

169
Q

Government Agency Issues are not ____ obligations of the US government but they are ____ obligations of the agencies themselves

(The exception is….)

A

Direct

Direct

(Ginnie Mae which is guaranteed by the federal government)

(3 G….Ginnie, Gov’t, Guaranteed)

170
Q

Government Agency and Sponsored Issues are quoted in ____ as a % of par value.

Are considered to be ____ assets for banks

Are exempt from registration requirements of the securities act if 1933

And generally have ____ yields than direct obligations of the US government

A

32nds

Non- Risk

Higher

171
Q

Municipal Bonds are…

A

Bonds issued by state and local government entities such as cities, counties, school districts, authorities, and the state

172
Q

Interest in a municipal bond is exempt from _____ income taxes and may also be exempt from _____ and _____ income taxes

For exam purposes they are ____ exempt from all taxes

A

Federal

State and Local

(Fully)(Tax Free)

173
Q

General Obligations Bonds are…

Are also called “_____”

A

Bonds that are a general obligation of the issuing municipality (state, county, city, school district, etc.)

“Full faith and credit bonds”

174
Q

Payment of principal and interest with general obligation bonds is not limited to the revenues derived from ____.

The payments of Principal and Interest are secured by/from ____ collected by the municipality.

Most states require ____ to issue G.O. bonds.

A

Any one specific project

Taxes

Voter approval

175
Q

Revenue Bonds are…

They ___ require a vote of the citizens

They ___ count towards any constitutional or statutory limit on the amount of debt a municipality may incur

They are ____ payable from taxes and will ___ contribute to any possible future increase of taxes

A

Bonds where the payment of bond interest and principal depends on revenues generated from a particular facility (such as a toll road or bridge, rather than the taxing powers of a city or town)

Do Not

Do Not

Not

Not

176
Q

Industrial Development Bonds OR Industrial Revenue Bonds

This enables the company to borrow at ____ rates

Interest and Principal is payable solely by ___

The companies for whom the bonds were issued are ______

Substantial users may be ____ if they buy the bonds

A

The municipality approves the sale of bonds on “behalf of” a corporation to construct or purchase facilities that are then purchased by or leased to a private user

Tax Free

The Company

Responsible for the debt

Taxed on interest

177
Q

Taxable Equivalent Yield shows

A

The comparable returns on corporate and municipal bonds

178
Q

Taxable Equivalent Yield Formulas

(Municipal Yield to Corporate Equivalent)

CROSS MULTIPLY TO GET TO THE OTHER

(Corporate Yield to Municipal Equivalent)

A

1) Municipal Yield / (100%-Investors Tax Rate) = Corporate Equivalent Yield

CROSS MULTIPLY TO GET TO THE OTHER

2) Corporate Yield X (100%-Investors Tax Rate) = Municipal Equivalent Yield

179
Q

Alternative Minimum Tax (Designed for, applied to)

What muni bonds can it apply to?

A

Designed to make sure that even the wealthiest individuals, trusts, estates, and corporations pay some income tax

Is applied to “Tax Preference” items

May be applied to some muni bonds which are issued for private industry purposes such as waste management companies which provide a public service

180
Q

The Official Statement (OS) is…

What must happen if provided? Or doesn’t have to happen if not?

A

The disclosure document that can be provided by the issuer and is like a prospectus (it is not required)

(Contains the most detailed financial information on a new issue of municipal bonds)

Must be provided to all customers who purchase the new issue and be provided to broker dealers upon request

If not provided broker dealers do not need to provide it to purchasers of the bond or other broker dealers

181
Q

Negotiated Deals is…

Underwriting agreement does?

A

The municipality hires a managing underwriter to handle the distribution of a new issue of revenue bonds

Describes terms and interest costs for the offering which are negotiated directly between the municipality and the managing underwriter

182
Q

Competitive Bidding is…

Bonds are awarded to…

Net Interest Cost is (NIC)…

How to determine NIC

A

The municipality requests sealed bids from underwriters or underwriting syndicates

Bonds go to the group that offers the municipality the lowest net interest cost

NIC is the total amount of interest that the municipality will pay on the bond issue

Any premium over par that is received when the bond is sold is subtracted from the interest cost on the issue

183
Q

Most General Obligation bonds are awarded on the basis of ____

A

Competitive Bidding

184
Q

Issuers are also interested in knowing the “_____” because it considers the time value of money, whereas net interest cost does not

A

True Interest Cost

185
Q

Municipal Notes

A

Short term debt instruments for temporary or interim financing

186
Q

Tax Anticipation Notes (TAN) are…

A

Used to raise monies which will be paid off with tax receipts in the near future

187
Q

Revenue Anticipation Notes (RAN) are…

A

Raises monies which will be paid off when certain revenues are realized or received

188
Q

Tax & Revenue Anticipation Notes (TRAN) are…

A

A combination of a tax and revenue note

189
Q

Bond Anticipation Note (BAN) are…

A

Used to raise money which will be paid off from the sale of bonds in the future

In the meantime it will issue notes to carry it through until the long term bond revenues are received

190
Q

Grant Anticipation Notes (GAN) are…

What are they dependent on?

A

Grants received by municipalities from the federal government generally from the “federal transit authority” program for the purchase of buses, trains, ferries, vans and support equipment

Congressional Appropriation

191
Q

Other Types of short term obligations of a municipality include… (3 kinds)

A

Construction Loans Notes (CLN)
Demand Notes
Tax-Exempt Commercial Paper

192
Q

Construction Loans notes are…

A

Notes typically issued to fund housing projects

193
Q

Demand Notes are…

A

Used for short term financing that are callable on demand

194
Q

Tax Exempt Commercial Paper is…

What are its uses (3) and what is it NOT used for (1)

A

“Paper” that is issued for a max of 270 days (short term)

  1. Raise Working capital
  2. Cover extraordinary expenses
  3. Cover construction or maintenance costs

NOT USED to refund outstanding bonds (you’d want long term bonds to refund those)

195
Q

Build America Bonds (BABs)

Can not be used to refinance _____

Interest payments are ____ to investor

Interest paid by the municipality is subsidized either by the federal government paying back ____ of paid out interest or the bondholder may take a federal tax credit equal to ____ of the interest expense

Expands the market for municipal bonds to ____ plans and ____ investors

A

Taxable Municipal bonds issued for infrastructure rebuilding

Outstanding debt

Fully Taxable

35% and 35%

Pension Plans, Foreign Investors

196
Q

Municipal Fund Securities include…

A

Local Government Investment Pools (LGIPs), ABLE Programs, and 529 Plans

197
Q

Local Government Investment Pools (LGIPs) are…

A

A form of fund that is created under individual state law to allow smaller government entities, such as cities and counties, to pool assets in order to achieve better diversification, portfolio management, lower costs, and still provide liquidity to contributing entities

Exempt from registration with SEC providing flexibility but reducing level of protection for investing entities

198
Q

MSRB political contribution limits (MSRB Rule G-37) does what?

“Official of the issuer is”

A

Governs political contributions made by municipal finance professionals, municipal dealers, or political action committees controlled by the broker-dealer or MFL to officials of an issuer

Any person (including election committee for such person) who was at the time of the contribution an incumbent, candidate, or successful candidate (even if they lose)

199
Q

Contributions per MSRB can not exceed ____ per election and the municipal finance professional must be ____ in the election.

If a violation occurs the municipal dealer with whom the MFP is associated is prohibited from engaging in municipal securities business for ___ years with the issuer to which the improper contribution was made

Each municipal dealer must file a form ____ with the MSRB ____ with information about contributions to officials of issuers and political parties and bond ballot campaigns in excess of permitted contributions

A

$250/Able to vote

2 years

G-37/ Quarterly

200
Q

Municipal Variable Rate Securities are…

A

Debt securities which have floating or fluctuating interest rates (rates usually reset at specified intervals but normally have a final maturity which is more than 10 years from date of issuance)

201
Q

Municipal Variable Rate securities include… (3)

A
  1. Variable Rate Demand Obligations or Notes (VRDO) or “floaters”
  2. Floating Rate Notes (FRNs)
  3. Auction Rate Securities (ARS)
202
Q

Variable Rate Demand Obligations and Floating Rate Notes can be offered with a ____ feature allowing the investor to sell security back to the issuer generally at full face value plus accrued interest.

Auction Rate Securities are NOT offered with a ____ feature

A

Put

203
Q

Money Market Instruments are

A

High quality, short term (mature in 12 months or less) debt instruments

204
Q

Money Market Instruments include (4)

A

Treasury Bills
Negotiable Certificates of Deposit
Commercial Paper
Bankers Acceptances

205
Q

Treasury Bills are the ___ liquid off all money market instruments

A

Most

206
Q

Negotiable Certificates of Deposit (CDs) are ___ deposits

Issued and guaranteed by ____

____ minimum deposits

Fixed maturity of ___ year or less

Usually trade ____ and are in ____ form

Penalties may be incurred if cashed ___ to maturity

A

Time

Banks

$100,000

One

“Plus Interest”….registered

Prior

207
Q

Eurodollar certificates of deposit are short term instruments issued by banks ____ the US. Interest and principal is paid in _____

A

Outside

US dollars

208
Q

Long Term CDs may have maturities of ____, _____, and _____ years

A

3,5,10

209
Q

Commercial Paper is….

Commercial Paper is repaid from _____. Issued for a ____ amount and has a maturity date with a max maturity of ____ days.

It is ____ guaranteed by the FDIC (Federal Deposit Insurance Corporation)

A

An unsecured promissory note issued at a discount by corporations generally used to finance daily operations (not international trade)

Accounts Receivable, Specific, 270

Not

210
Q

Bankers Acceptances are used to finance ____ trade and are similar to a letter of credit

They are the ____ liquid of all money market instruments

A

Foreign

Least

211
Q

Exchange Risk is associated with ____ and ____ debt issues but NOT ____ or ____ debt issues

A

Foreign/Sovereign

US/Domestic

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