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Series 7- Passed with 83% > Chapter 2- Debt Securities Continued 16-25 > Flashcards

Chapter 2- Debt Securities Continued 16-25 Flashcards

1
Q

US government and agency securities

How they are issued

A

Interest on gov securities is usually exempt from state and municipal tax

Largest borrower, best credit

Book- Entry Form= no physical security is issued

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2
Q

T-Bills

A

Short term debt issued at discount from par

Maturities of 4, 13, and 26 weeks and auctioned weekly

Example of a zero-coupon security

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3
Q

Treasury Notes

A

Pay interest every 6 months

Sold at auction every 4 weeks in denominations of $100-$5mm just like tbills

2 to 10 year maturity

Mature at par or are refunded meaning the investor receives a new security at different coupon

Traded in percentages of 1/32s

Example: Quote of 98.24 means 98.75%

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4
Q

Tbonds

A

10 to 30 years, interest every 6 months

$100-5mm

Sell same way as T-Notes

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5
Q

Treasury receipts

A

Created by brokerage firms, they are zero coupon bonds of US treasury notes and bonds

Not backed by US government

Can purchase receipts for any of the treasury payments or the principal
10yr bond would have 21 receipts available

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6
Q

STRIPS

A

Seperate Trading or Registered Interest and Principal of Securities

Backed in full by Us government

Similar in nature to a Reciept

Zero coupon bonds issued at deep discount

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7
Q

Treasury Inflation Protection Securities (Tips)

A

Fixed interest rate but the Principal is adjusted semiannually= to the amount change in CPI

Interest payment is equal to new principal times the rate

Sold at lower price

Taxable event when inflation is present

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8
Q

Government/private agencies that are able to issue debt securities

A
  1. Farmers Credit Administration
  2. Ginnie Mae (GNMA)
  3. Freddie Mac (FHLMC)
  4. Fannie Mae or FNMA
  5. Student Loans Sallie Mae or SLMA
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9
Q

Agency Issues

A

Higher yield than treasury obligations but lower than corporate

Mortgage backed issues are taxed at all three levels, others at Fed only

Quoted as a percentage of par and trade actively

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10
Q

Government National Mortgage Association (GNMA)

HIGHLY TESTED

A

Backed fully by government, for the department of housing and urban development

Purchase pooled mortgage loans as a security

Only backs single and multi family homes

Guarantees timely payments of monthly interest and principal

Issued with face of 25,000, but can be purchased at $1,000 minimums

Assumes repayment in 12 years and yield is stated as such

Risk associated with mortgage backed securities include prepayment and extended maturity risk, along with typical interest risk

Taxed at all levels

Example of pass through certificate and has significant reinvest risk

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11
Q

Farm Credit System (FCS)

A

Agricultural financing and credit

Raises loanable funds by selling securities

Offer discount notes, bonds and master notes ranging from 1 day to 30 years

Exempt from local and state taxes

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12
Q

Federal Home Loan Mortgage Corp (Freddie Mac)

A

Created secondary market for mortgages by packaging them into securities

Pass through security- passing interest and principal payments from mortgage holder to the investors

Two Types: Mortgage participation certs (pcs) and Guaranteed Mortgage Certs (GMCs)

Pcs= once a month Interest and principal are paid
GMCs= Twice a year interest, once principal

Income is subject to All 3 tax levels

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13
Q

Federal National Mortgage (Fannie Mae)

A

Publicly traded corporation

Purchases insured mortgages from FHA and VA

Debentures, short discount notes, and mortgage backed securities

5k, 25k, 100k, 500k, 1mm

3-25 year maturity for debentures and sold in incriminates of 5000 over 10k, interest semiannual

Book-entry form

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14
Q

Student Loan Marketing Association

A

Issues discount notes and short term floating rate notes

Floaters have 6 month mature

Listed on market for trading at SLM

Interest is paid semiannually and exempt from state and local tax

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15
Q

Bidding for government securities

A

Two types of bids:
1. Competitive bids- Placed by primary dealers in US government securities. Usually large banks and are required to bid.

  1. Non competitive bids- Smaller banks, brokers, insurance companies, individuals

Always filled but usually pay the lowest accepted competitive bid (stop out price)

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16
Q

Dutch Auction

A

Though competitive and noncompetitive bids are made, the lowest price bid is what everyone pays

Make bids in yields

Stop out price is last bid accepted

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17
Q

When does settlement take place?

A

Thursday of that week for Tbills and Thursday of following week for tnotes

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18
Q

Accrued interest

A

Bonds are usually traded at price and interest

Starts accruing interest on the dated date

Seller will receive interest up to but not including the settlement date

2 methods to calculate:
1. 30 day month (All corporate/municipal)
Principal x interest rate x elapsed days/ 360
2. 365 day (all US gov bonds)
Principal X interest rate x elapsed/ 365

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19
Q

Settlement time

A

Settlement on a US gov bond is the next business day after a trade

The interest date is included as a day in both calculations

Never assume a leap year

Zero coupon, income bonds trade flat (no accrued interest)

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20
Q

Basics of a CMO

A

Asset backed security, usually auto loans

Are sometimes backed by government agencies so are highly rated

Structured in security classes called tranches

Repays principal to one traunch at a time

A CMOs yield and maturity is estimated by the Public Securities Association (PSA)

Cannot be compared to anything but itself

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21
Q

Plain Vanilla CMO

A

Pays interest to all tranches but only repays principal to one tranches at a time in $1000 increments

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22
Q

Principal only CMO (POs)

A

Sells at discount to par, market value is volatile

Value rises as interest rates drop

Income comes from principal payments and prepayments

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23
Q

Interest only CMOs (IOs)

A

IOs increase in value when interest rates rise and sell at discount

Raise in value when rates rise because there will be more payments

As the IO matures, the cash flows from the security will fall

Can be used to hedge against interest rate risk

24
Q

Planned Amortization Class CMOs (PACs)

A

Retired first and offer protection against prepayment and extension risk

Lower yields than comparable TACs

25
Targeted Amortization Class (TACs)
Transfers prepay risk to a companion tranche but does not offer protection from extension riske
26
Zero Tranche CMO
No payment until all other tranches are paid Most volatile
27
Inverse Floater CMO
High leverage risk Thinly traded mortgage securities, may lose principal pay if rates rise
28
CMO characteristics
Not backed by US gov, but the private institutions related to yields more than a treasury security Rate of principal repay varies Rate falls mean principal is paid back quicker Rate rise means principal paid slower Interest is subject to all 3 level tax Issued in 1000 incraments, and large market Must sign a suitability statement for PACs, TACs and other CMOs
29
Collateralized Debt Obligations
No specific type of debt, usually non mortgage loans Different types of debt and credit risk Each tranche has different risk allocation and maturity The issuer of the CDO owns the asset More suitable for institutional or Sophisticated investors
30
Series EE bonds
Nonnegotiable and cannot be transferred Fixed rate of interest over 30 years Minimum denomination of $25 Can be redeemed after 1 year 3 month interest penalty for redemption in first 5 years All are issued electronically Compounded semiannually, only taxed at Fed and can be deferred until redemption
31
Series I
Interest added monthly and paid on maturity Grow with inflation for up to 30 years Fixed rate of return plus a variable semiannual interest rate Fed taxed, can be deferred and can be deducted if used to pay for school
32
Money Market Securities
``` Tbills Repurchase Agreements Reverse repurchase agreements Bankers acceptance Commercial paper Negotiable CDs Fed funds ```
33
Repurchase agreements Reverse
Sells securities temporarily with promise to buy back later Include a repurchase price and maturity date Generally lower interest rate than a bank loan Major risk is interest rate risk Reverse= dealer agrees to buy and sell back at higher price
34
Bankers acceptance
Basically a post dated check or line of credit Usually payable in 1 and 270 days Usually paying for goods in a foreign country
35
Commercial Paper Direct paper
Corporations issue Short term, unsecured promissory notes to raise cash to finance accounts receivables Sold at discount to par 1-270 days, issued in book entry form Direct- sold by finance companies directly to public
36
Certificate of Deposit (4 types)
Fixed interest rate, minimum face of 100,000 Negotiable- Time deposits to a bank, tradable in secondary, accrued interest included in price Nonnegotiable are offered by banks and are not tradeable in secondary market Brokered CD- Subdivided master CD issued by broker/dealer. Must be sold in market to be redeemed early. Most brokers will also put in a call feature so if interest rates drop, they can call the bond. FDIC may not insure Step up or step down CD- fixed rate of interest for usually a year and then the rate is adjusted
37
Fed funds rate
What banks charge each other for overnight loans of $1 million or more Most volatile rate in economy, listed daily
38
Prime Rate
What commercial banks charge credit worthy corporations for unsecured loans Raises and lowers with money supply
39
Discount Rate
Rate Fed charges for short term loans to member banks Indicates monetary policy Only interest rate set by the Federal Reserve directly
40
Broker loan rate
Rate for margin account customers | Usually percentage point above other short term rates
41
Call money rate
Charge on loans to broker dealers
42
Commercial Paper
Rate on high grade unsecured notes Quoted as a percentage of par WILL SEE SEVERAL RATE QUESTIONS ON SERIES 7
43
Euro Dollars
US dollars deposited abroad Usually overnight to 180 day deposits Usually based on London Interbank Offered Rate Issued outside of the Us
44
EuroBonds
Euro bonds are Any long term debt instrument sold outside of country currency Eurodollar indicates it pays in US dollars/currency US government does not issue Euro Dollar Bonds
45
Interbank Market
Unregulated, decentralized international market for currencies Usually done in a spot trade which settles in a day Fed can sell US dollar to lower the currency rate Or buy to raise the rate of the USD
46
Trade Reporting and Compliance Engine (TRACE)
FINRA approved trade reporting system for corporate and gov agency bonds Not an execution system Both sides of trade must report, must be reported within 15 minutes of execution, and must include basic details US treasury, debt of foreign gov, money market instruments and debt securities at not reported
47
TBills pricing
Quoted at yield or discount rates
48
Equity Linked Notes
Debt instrument where final payment is based on the return of a stock Easily invested and divested Unsecured debt instrument Do not offer current interest payments or a fixed return at maturity
49
Capital market
Anything that has a return set for a year plus in advance
50
Principal protected notes
FINRA has cautioned that no one should Market that 100% of principal is protected
51
Primary dealers in US government securities are selected by
The Federal Reserve Board
52
Guarenteed bonds
Guaranteed of payment by another corporation
53
Euro dollar bonds registrations
Do not have to be registered with the SEC
54
Loose money
Interest rates fall in loose money periods Corporate bond prices rise
55
If a Bond is called
The call price and the market value of the bond will converge So it's a question of whether the call or conversion price is higher

Series 7- Passed with 83% (19 decks)

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