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SIE Exam (Part 1) (Understanding Products & Their Risks) > Chapter 2 (Individual Securities - Debt) > Flashcards

Chapter 2 (Individual Securities - Debt) Flashcards

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SIE Exam flashcards
1
Q

What are the three different types of maturities for bonds?

A

Term
Serial (Savings Bonds)
Balloon

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2
Q

What is another name for the interest rate that a bond pays?

A

Coupon Rate

Stated/Nominal Yield

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3
Q

What type of calendar/calculation do corporate and municipal trades use?

A

30-Day-Month

360-Day-Year

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4
Q

How are bonds measured?

A

Points

Each point is worth 1% of face value ($10)

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5
Q

What type of relationships do bond prices and interest rates have?

A

Inverse Relationship
(Bond Price Increase, Interest Rates Decrease)
(Bond Price Decrease, Interest Rate Increase)

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6
Q

What are the three types of Bond Yield?

A

Nominal Yield
Current Yield
Yield to Maturity

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7
Q

What is Nominal Yield?

A

Stated at the time of issue
Coupon Rate
Stated Yield

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8
Q

What is Current Yield?

A

Bond’s annual coupon payment relative to its market price

Annual Coupon Payment / Market Price = Current Yield

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9
Q

What is Yield to Maturity?

A

Reflects the annualized return of the bond if held to maturity.
If the bond is purchased at a discount, the investor makes money
If the bond is purchased at a premium, the investor loses money.

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10
Q

How are Yields Measured?

A 
Basis Points (bps)
1/100 of 1%
A full percentage point is made up of 100 basis points
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11
Q

What is Yield to Call?

A

A bond with a call feature may be redeemed before maturity at the issuer’s options. The investor receives the principal back sooner than anticipated (maturity).

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12
Q

What are the three major credit rating agencies?

A

Fitch Ratings
Moody’s Investors
Standard & Poor’s (S&P500)

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13
Q

What are Investment Grade Debt Ratings?

A 
Eligible for Institutions and Fiduciaries, greater liquidity
AAA          (Aaa)
AA             (Aa)
A               (A)
BBB          (Baa)
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14
Q

What are High Yield Debt Ratings?

A 
Junk Bonds
Higher risk of default, may be subject to price erosion during slow economic times
BB          (Ba)
B             (B)
C            (Caa)
D            (D)
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15
Q

What are the three features of a bond?

A

Call (Issuer Calls it Back)
Put (Investor Puts it Back)
Convertible (Convertible to Common Stock)

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16
Q

What are U.S. Treasury with Zero Coupon Rates?

A

STRIPS

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17
Q

What are Treasury Receipts?

A

Zero’s issued by a BD

Not backed by full faith and credit of the Treasury

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18
Q

What is Phantom Income?

A

Though the interest payment is paid at maturity, owners of zeroes will pay taxes on the interest annually. The total interest payment is divided by the years remaining to maturity and a 1099 interest form will be sent to the owners.

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19
Q

What are Secured Debt Securities?

A

Backed by various assets owned by the issuer
Mortgage Bonds
Equipment Trust Certificates
Collateral Trust Bonds

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20
Q

What are Mortgage Bonds?

A

A corporation will borrow money backed by real estate and physical assets of the corporation.

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21
Q

What are Equipment Trust Certificates?

A

Corporations, particularly railroads and other transportation companies, finance the acquisition of capital equipment used in the course of their business. Title to the new equipment is held in a trust, until the certificates have been paid in full.

22
Q

What are Collateral Trust Bonds?

A

The corporation deposists securities it owns into a trust to serve as collateral for the lenders.

23
Q

What are Unsecured Debt Securities?

A 
Backked by the corproations full fiath and credit
Debentures
Guaranteed Bonds
Income Bonds
Subordinated Bonds
24
Q

What are Debentures?

A

Debt obligations of the corporation backed only by its word and general crediworthiness. Promise that the corporation will pay the principal at its due date and interest on a regular basis.

25
Q

What are Guaranteed Bonds?

A

Backed by a company other than the issuing corporation, such as a parent company. If the issuer defaults, the guranty kicks in and the guarantying company must make the interest or principal payments.

26
Q

What are Income Bonds?

A

Adjustment Bonds
Used when a company is reorganizing and coming out of bankruptcy. Only pay interest if the corporation has enough income to meet interest on debt obligations.

27
Q

What is Subordinated Debt?

A

Describes a type of debenture

Has claim that is behind that of any creditor

28
Q

Order of Liquidation

A 
Secured Debt Holders
Unsecured Debt & General Creditors
Subordinated Debt
Preferred Stockholders
Common Stockholders
29
Q

Benefits of Owning Debt Securities

A

Income

Safety

30
Q

Risks of Owning Debt Securities

A

Default
Interest Rate Risk
Inflation (Purchasing Power Risk)

31
Q

What are Municipal Bonds?

A

Securities isssued by state or local goverments or by U.S. territories, authorities, and special districts. Investors who buy such bonds are lending money to the issuers for the purpose of public works and construction projects
Tax free on State and Federal Level

32
Q

What are General Obligation (GO) Bonds?

A

Municipal bonds isssued for captial improvements that benefit the entire community. Do not produce revenues, so principal and interest must be paid by taxes collected
Bonds issued by states are backed by income taxes, license fees, and sales tax
Bonds issued by town/cities/counties are backed by property taxes, license fees, fines.
Require Voter Approval

33
Q

What are Revenue Bonds?

A 
Used to finance any municipal facility that generates suffieicent income. Interest payments are made exclusively from revenues by
Utilities
Housing
Transportation
Education
Health
Industrial
Sports
34
Q

What are short-term municipal obligations?

A 
TANs
RANs
TRANs
BANs
CLNs
GANs
35
Q

Formula for Tax Equivalent Yield

A

Divide the tax-free yield by 100% less the investors tax rate.

36
Q

What are the three types of Treasury Securities?

A

T-Bills (Less than 1 Year)
T-Notes (2-10 Years)
T-Bonds (Greater than 10 Years)

37
Q

What are T-Bills?

A

Less than 1 Year
Issued weekly maturities of 4, 13, 26, and at time 52 weeks
Can be issued at a discount
Highly Liquid
No Stated Interest Rate
13 Week T-Bills are stereotypes as risk free.

38
Q

What are T-Notes?

A

2-10 Years

Pay semi-annual interest rate as a percentage of par

39
Q

What are T-Bonds?

A

Greater than 10 Years (up to 30 Years)

Pay semi-annual interest rate as a percentage of par

40
Q

What are Treasury Receipts?

A

BD’s buy Treasury securities, place them in a trust at a bank, and sell separate receipts against the principal and coupon payments.
Not backed by full faith and credit of hte U.S. Goverment

41
Q

What is the Farm Credit System (FCS)?

A

A National network of lending institutions that provides agricultural financing and credit. The system is a privately owned, government-sponsored enterprise that raises loanable funds through the sale of Farm Credit Debt Securities

42
Q

What is GNMA (Ginnie Mae)?

A

Goverment owned corporation that supports the Department of Housing and Urban Development. GNMAs are the only ageny securities backed by the full faith and credit of the federal government.

43
Q

What is FHLMC (Freddie Mac)?

A

Created to promote the development of a nationawide secondary market in mortgages by buying residential mortgages from financial institutions.

44
Q

What is FNMA (Fannie Mae)?

A

Purchases conventional and insured mortgages from agencies such as the FHA and the VA.
Backed by FNMA general credit.

45
Q

What are Certificates of Deposit (CD’s)?

A

Its a banks promise to pay principal and interest - secured by no physical asset and backed only by the banks good faith and credit.

46
Q

What are Banker’s Acceptance?

A

Short-term time draft with a specified payment date drawn on a bank. A BA is postdated check or line of credit. The payment date of the BA is normally between 1 and 270 days (9 months)

47
Q

What is Commerical Paper (Prime Paper/Promissory Note)

A

Used to raise cash to finance accounts receivable and seasonal invetnory gluts.
Maturity between 1 and 270 days (9 months)

48
Q

What are Repurchase Agreements (REPO’s)?

A

A financial institution reases cash by temporarily selling some of the assets it holds with an agreement to buy back the assets at a later date at a slightly higher price.

49
Q

What is a Federal Funds Loan?

A

Federal funds can be loaned from one member bank to another for the purpose of meeting the reserve requirement. These loans are very short term and can occur overnight.

50
Q

What are Colateralized Mortgage Obligations (CMO’s)

A

Pool a large number of mortgages, usually single-family residences. Issued by private-sector financing corporations and are often backed by GNMA, FHLMC, and FNMA

51
Q

What are Collateralized Debt Obligations (CDO’s)

A

A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors. These assets become the collateral if the loan defaults.

52
Q

Why would you place money market securities in a client’s portfolio?

A

Highly Liquid
Very Safe
Good place to invest money that will be needed soon.

SIE Exam (Part 1) (Understanding Products & Their Risks) (6 decks)

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