Chapter 4: Debt Instruments Flashcards
A bond is a(n) ______. Consequently, it creates a(n) ______ for the issuer. The bond investor is the ______. Bonds are issued by ______, ______ (state and local governments and political subdivisions), and the ______.
- Debt Instrument
- Liability
- Lender
- Corporations
- Municipalities
- U.S. Government
The face amount of the bond or its par value is ______ per bond. Bonds have a stated ______ which expresses the income the investor will receive on the bond. It is always expressed as an annual percentage; however, most bonds pay every ______, or ______.
- $1,000
- Interest Rate
- 6 Months or Semiannually
Bonds are called “______” securities because of their fixed, semiannual interest payments. Because of this, bonds have limited ______ potential.
- Fixed Income
2. Growth
Bonds have priority over stock in the event of ______.
Liquidation
The relationship between an investment’s risk and its yield is called the ______, which dictates that the higher an investment’s risk, the higher its potential reward.
Risk/Reward Ratio
______ risk, also known as ______ or ______ risk, is the risk that an issuer may become unable to meet interest or principal payments on its bonds. In other words, the issuer may become ______, and forced into bankruptcy.
- Credit
- Business or Default
- Insolvent
Many factors affect an issuer’s ______ risk, such as competitive pressure, market share, profit margin, and competence of management.
Credit
______ risk is usually managed with a long-term focus.
Credit / Business / Default
______ are safer than ______ when an insolvent corporation liquidates because ______ are paid before ______.
- Bonds
- Stock
- Bonds
- Stock
Different bond issuers expose the investor to different levels of default risk. ______ debt is considered the safest category of debt. ______ debt is considered the next safest debt category. The riskiest category of debt is ______ debt.
- U.S. Government
- Municipal
- Corporate
The threat of suffering a loss due to a change in the interest rate is called ______ risk. All fixed income securities are subject to this risk. Even U.S. Treasury bonds, which have very little default risk, carry this risk.
Interest Rate
______ maturities are at greater interest rate risk than ______ maturities. Also, the ______ the bond’s stated interest rate is, the more volatile the bond.
- Longer
- Shorter
- Lower
The relationship between bond prices and interest rates is ______. As rates rise, bond prices ______. And as rates drop, bond prices ______.
- Inverse
- Drop
- Rise
______ risk, also known as ______ risk or ______ risk, is the risk that an investment’s value is negatively affected by inflation.
- Inflation
2. Purchasing Power or Constant Dollar
______ is defined as a general rise in prices and a resulting loss in the purchasing power of money. It is created by too many dollars chasing too few goods, which causes the cost of gods to rise.
Inflation
As fixed income securities, bonds are subject to ______ risk. The value of the bond’s fixed semiannual interest payments steadily ______ during inflationary periods, as does the value of the ______, which is received at maturity.
- Inflation
- Decline
- Face Amount
______ risk is the risk that in a falling interest rate environment, bond proceeds must be reinvested at lower rates, reducing the investor’s yield.
Reinvestment
An investor who wishes to eliminate reinvestment risk over the life of a bond will purchase a(n) ______, which has no stated interest rate and pays no semiannual interest. It is purchased at a large ______ from its par value, which is $1,000. At maturity, the investor receives par value from the issuer. The difference between the investor’s deeply ______ purchase price and par value received at maturity is the investor’s interest; the investor locks in a yield over the life of the bond.
- Zero-Coupon Bond
- Discount
- Discounted
Zero coupon bonds are also called ______, or ______.
Original Issue Discounts (OIDs)
______ risk is the risk that a callable bond will be redeemed by the issuer before maturity. This happens at the worst time for the bondholder: when interest rates have ______.
- Call
2. Fallen
While exercising its call privilege benefits the ______, it negatively impacts the ______. If the ______ reinvests the principal in similar bonds, the yield will be substantially lower since the interest rate has been significantly reduced.
- Issuer
- Bondholder
- Investor
Callable bonds have ______ stated, or nominal, interest rates. The investor accepts call risk in order to receive the ______ bond yield.
Higher
Issuers pay a higher interest rate for ______ bonds because they want the privilege to refinance at lower future interest rates, should they manifest. The higher interest rate is the ______ of purchasing this future refinancing right. Issuers often prepare for future calls by setting aside money for this purpose in a(n) ______.
- Callable
- Cost
- Sinking Fund
Callable bonds are callable at a price above call, which is known as the ______. This makes the call risk more palatable to bond investors.
Call Premium
An investor can avoid ______ risk by purchasing noncallable bonds. In doing so the investor must accept lower ______.
- Call
2. Nominal Yields
Securities whose market value is denominated in a foreign currency, or whose interest or dividends are paid in a foreign currency, have ______ risk. It is the risk where changes in the U.S. dollar/foreign currency ______ negatively impacts the security.
- Currency
2. Exchange Rate
A Eurobond is a bond that is issued outside the U.S. and is denominated and pays interest in a foreign currency. If this currency falls against the dollar, the value of the interest payments and principal to an American investor will ______.
Decline
______ is the degree to which an asset can be quickly converted to cash.
Liquidity
______ risk is the risk that an asset cannot be sold quickly, or that selling quickly will result in a substantial loss.
Liquidity
______ securities generally have less liquidity risk than ______ securities. Liquidity risk ______ as the total quantity of a security decreases.
- Actively Traded
- Thinly Traded
- Increases
______ risk is the risk of being unable to buy or sell a security, thus sustaining a loss.
Marketability
If a security is actively traded, it has ______ marketability risk. However, if the security is thinly traded or not traded, it carries ______ marketability risk.
- Little
2. High
______ risk is similar to liquidity risk, except that ______ is not concerned with the price, only the ability to buy or sell.
Marketability
______ risk, also called ______ risk or ______ risk, is the risk that changes in law will negatively impact the value of a security.
Regulatory / Legislative / Political
Regardless of the way bonds are priced, whether they are based on dollar amount as a percentage of par or in basis points, the ______ affects the price. For example, large ______ will have preferential pricing.
- Block Size
2. Block Sizes
______ are also called dollar bonds.
Term Bonds
In a(n) ______ issue, all of the bonds are issued at once and all mature at once.
Term Bond
Term bonds are priced in points as a percentage of ______. Each point equals ______.
- Par Value
2. $10
______ are quoted as either a percentage yield or in basis points.
Serial Bonds
One basis point (BP) equals ______ of ______. For example, a 6.10% yield equals ______ basis points, or BPs.
- 1/100th
- 1%
- 610
In a(n) ______ issue, all of the bonds are issued at once. However, they mature in increments over several years. For example, a $1,000,000 bond issue might mature in $200,000 increments over 5 years.
Serial Bond
If two investors purchase bonds from the same issue with different maturity dates, they will actually have different ______ based on the number of years to ______.
- Yields
2. Maturity
The ______ is the rate which the issuing corporation has contracted to pay interest through the life of the bond. This rate never changes; the issuer will pay the rate until the bond matures and is extinguished.
Stated Rate / Nominal Yield / Coupon Rate
The ______ is calculated by dividing the annual interest by the current market value of the security rather than the face amount (or ______) of the bond.
- Current Yield
2. Par Value
An increase in the bond’s current market value results in a(n) ______ in its current yield. This is an example of the ______ relationship between price and yield.
- Decrease
2. Inverse
A bond’s ______ represents the return on investment by relating the annual coupon rate to the current price of the bond.
Current Yield
Assuming a face value of $1,000, the current yield on a 10% coupon bond priced at $900 would be ______.
11.11%
Current Yield = (Annual Interest) / (Current Market Price)
Current Yield = ($1,000 x 10%) / ($900) = 100/900 = 0.1111 = 11.11%
If a bond with a par value of $1,000 was purchased for $802, and paid a coupon rate of 5%, its current yield is ______.
6.23%
Current Yield = (Annual Interest) / (Current Market Price)
Current Yield = ($1,000 x 5%) / ($802) = 50/802 = 0.0623 = 6.23%
Bonds trading at a(n) ______ to par will have a current yield that is higher than the coupon rate.
Discount
Bonds trading at a(n) ______ to par will have a current yield that is lower than the coupon rate.
Premium
The ______, expressed as a percentage, is the total return that would be realized on a bond or other fixed income security if the bond were held until the maturity date. In other words, it is the ______ the investor will receive.
- Yield to Maturity (YTM)
2. Overall Return
Yield to maturity may be greater than the current yield (if the bond is selling at a(n) ______) or less than the current yield (if the bond is selling at a(n) ______).
- Discount
2. Premium
______ considers not only the nominal yield realized during the holding period, but also the difference (gain or loss) between the purchase price and par value received at maturity.
Yield to Maturity (YTM)
______ takes into account:
- Annual interest, or coupon payments in dollars.
- Number of years to maturity.
- Par value (or face value) realized at maturity.
- Price paid.
Yield to Maturity (YTM)
The ______ is a rate of return measuring the total performance of a bond (coupon payments as well as capital gain or loss) from the time of purchase until maturity.
Yield to Maturity (YTM)
______ = (Annual Interest + Annualized Gain OR - Annualized Loss) / [ (Purchase Price + Redemption Price) / 2 ]
Yield to Maturity (YTM)
______ evaluates the performance of a callable bond from purchase to the call date. It is the yield realized on a callable bond if the bond was redeemed by the issuer on the next available call date.
Yield to Call (YTC)
The YTC calculation uses the ______ rather than par value. This ______ is frequently at a premium price over par. In other words, the yield would be based on the ______ at the time the bond is called.
- Call Price
- Cal Price
- Call Premium
- ______: Annual interest payment paid by bond issuers.
- ______: Nominal yield or coupon rate.
- ______: Face amount of a bond.
- ______: Annual interest divided by the current market value of the bond.
- ______: Rate at which the issuer has agreed to pay interest.
- ______: Measures total performance including interest and capital gains/losses.
- ______: Measure of performance from purchase date to first call date.
- Coupon: Annual interest payment paid by bond issuers.
- Stated Rate: Nominal yield or coupon rate.
- Par Value: Face amount of a bond.
- Current Yield: Annual interest divided by the current market value of the bond.
- Nominal Yield: Rate at which the issuer has agreed to pay interest.
- Yield to Maturity: Measures total performance including interest and capital gains/losses.
- Yield to Call: Measure of performance from purchase date to first call date.
The prices of ______ bonds fluctuate more than ______ bonds when interest rates change. The ______ the maturity, the less volatile a bond is relative to current interest rate fluctuations.
- Long-Term
- Short-Term
- Shorter
Bond yields move in the ______ direction of bond prices; therefore, when a bond is selling above the par, the current yield and yield to maturity, as well as the yield to call, are ______ the nominal yield.
- Opposite
2. Below
The ______ yield is always fixed. It is the ______ determined at the time the bond is issued.
Stated Rate / Nominal Yield / Coupon Rate
Bonds are quoted in terms of ______, which represent a percentage of a bond’s par value.
Bond Points
A bond point is equal to ______ for a bond with a par value of $1,000.
$10
One point equals 1% per $100 of par value.
The last transaction in ABC 5.00s 2030 was 101. In this situation:
- ABC is the ______.
- 5.00 is the ______.
- 2030 is the ______.
- ______ is the current price.
- Bond
- Interest Rate
- Maturity Date
- $1,010 (multiply 101 by $10)
A(n) ______ equals 10 cents, or $0.10. A change of one ______ equals a change of $0.10 in the amount of interest paid on a bond with $1,000 par value.
Basis Point
A bond is quoted in ______. If a bond is quoted at 102, the price of the bond is ______.
- Bond Points
2. $1,020 (102 x $10)
If a bond is quoted at 97, it is a(n) ______ bond selling at ______, which is below its par value of $1,000.
- Discount Bond
2. $970 (97 x $10)
When quoting or sending a confirmation out to the investor, you must always quote the ______ yield between yield to maturity and yield to call.
Lowest
When a bond is at a premium, ______ is the lowest yield, which is how a premium bond would be quoted.
Yield to Call (YTC)
When a bond is at a discount, ______ is the lowest yield, current yield would be higher, ______ or “basis” is higher still, which is how a discount bond is quoted, and ______ would be highest.
- Nominal Yield
- Yield to Maturity (YTM)
- Yield to Call (YTC)
On a(n) ______ bond, the nominal yield, current yield, and yield to maturity are the same.
Par
On a(n) ______ bond, the highest yield is the yield to maturity, followed by the current yield. The nominal yield is the lowest yield.
Discount
On a(n) ______ bond, the highest yield is the nominal yield, followed by the current yield. The yield to maturity is the lowest yield.
Premium
Discount Bond:
Highest yield is \_\_\_\_\_\_ (cannot quote). Next highest is \_\_\_\_\_\_ or \_\_\_\_\_\_. Third yield is \_\_\_\_\_\_. Lowest yield is \_\_\_\_\_\_. Discount bonds MUST BE quoted to the \_\_\_\_\_\_ yield.
- CALL
- MATURITY or BASIS
- CURRENT
- NOMINAL
- MATURITY
Premium Bond:
Highest yield is \_\_\_\_\_\_. Next highest yield is \_\_\_\_\_\_. Third yield is \_\_\_\_\_\_ or \_\_\_\_\_\_. Lowest yield is \_\_\_\_\_\_. Premium bonds MUST BE quoted to the \_\_\_\_\_\_ yield.
- NOMINAL
- CURRENT
- MATURITY or BASIS
- CALL
- CALL
You must inform the investor of the worst-case scenario. When quoting yields on the trade confirmation, the broker/dealer must quote the lowest yield between ______ and ______.
- Yield to Maturity (YTM)
2. Yield to Call (YTC)
______ (______) is the measure of the current net market yields on a mutual fund’s investment portfolio.
- Standardized Yield (SEC Yield)
Standardized yield (SEC yield) is based on the ______ for the ______ period ending on the last day of the previous month divided by the highest ______ on that last day.
- Net Investment Income
- 30-Day
- Offering Price
Interest is paid for the 6-month period ______ the interest payment date.
Before
When a bond is sold somewhere in the middle of the 6-month period, the seller has earned the first portion of the interest and the new buyer will earn the remainder. This results in a(n) ______, also called a(n) ______.
- Irregular Coupon
2. Odd First Coupon
When a bond is purchased, the byer pays for the bonds, plus the ______. The seller receives the price of the bonds, plus the ______. It is important to remember that ______ is added to both the buyer’s and seller’s confirmation.
Accrued Interest
Corporate, municipal, and government agency bonds calculate accrued interest using every month having ______ and every year having ______. Regular way settlement for these bonds is ______.
- 30 Days
- 360 Days
- T+2
Government notes and bonds calculate accrued interest using every month having ______ and every year having ______. Regular way settlement for government notes and bonds is ______.
- Actual Days
- Actual Days
- T+1
When calculating accrued interest, the accrual period is from the last ______ date up to but not including the ______ date.
- Interest Payment
2. Settlement
If ______, the issuer of the bonds has transferred title to specific assets to the custody of the trustee. In order words, the bond is backed by the pledge of collateral, a mortgage, or other lien.
Secured
______ bonds have priority in the event of liquidation over all other claimants, excepting the IRS and employees’ wages.
Secured
The most common assets backing secured bonds are ______ through ______, ______ owned and operated by the issuer, and ______, as in collateral trust certificates.
- Real Estate
- Mortgages
- Equipment
- Securities
______ bonds (most common type of secured bonds) are collateralized by a lien or mortgage against real property. Corporations issue both first and second ______ bonds, with the first-______ holders retaining a senior position with respect to a claim on assets in the event of a foreclosure or liquidation.
Mortgage
______ bonds can be issued as either open-end or closed-end.
Mortgage
A(n) ______ bond allows the corporation to issue subsequent bonds secured by the same property at a later time. ______ bonds specify the maximum indebtedness the corporation can issue against the same lien. ______ bonds offer the investor greater protection.
- Open-End
- Closed-End
- Closed-End
The ______ will specify if the secured bonds are open-end or closed-end. It is a contract between the issuer and the trustee, who acts on behalf of the bondholders.
Bond Trust Indenture
In a(n) ______ bond indenture, the new bonds have equal status with the original bonds. In other words, new bonds have equal claim, or parity of title, to the collateral.
Open-End
A(n) ______ bond indenture potentially reduces the safety of the original bonds, since more bonds have claim to the same collateral. Frequently, a requirement must be met before additional bonds may be issued.
Open-End
A(n) ______ bond indenture requires that if additional bonds are issued, they must be subordinate in collateral claim status to the original bonds.
Closed-End
Investors prefer bond indentures with a(n) ______ clause.
Closed-End
______ are usually issued by railroads and airlines, and are secured by railroad cars and airplanes. Historically, these have proven to be secure investments because the bonds are retired at a faster rate than the equipment is depreciated.
Equipment Trust Certificates
With equipment trust certificates, it is the ______ who owns and operates the equipment, not the equipment ______.
- Issuer
2. Manufacturer
American Airlines might issue ______ and use airplanes as collateral. This collateral is sometimes called “______,” meaning major movable equipment.
- Equipment Trust Certificates
2. Rolling Stock
______ are backed by the securities of a different issuer. For example, suppose Dell Computer owns several shares of Intel stock. If dell issued a(n) ______, it might use the Intel stock to secure the bond. If Dell defaulted on its ______, the Intel would be sold to satisfy the bondholders’ claim.
Collateral Trust Certificate(s)
Of all secured corporate debt, ______ are considered the most senior.
First Mortgage Bonds
______ or ______, the most common type of unsecured debt, are backed only by the full faith and credit of the issuer; there is no specific collateral backing.
- Debentures
2. Unsecured Corporate Bonds
Because ______ are not backed by specific collateral, they carry more risk than secured bonds. Consequently, they generally pay a higher ______ than a secured bond from the same issuer.
- Debentures
2. Coupon Rate
Well-established corporations usually issue ______.
Debentures
In the event of default, the claims of debenture holders are ______ to those of secured bondholders but take ______ over those of stockholders.
- Subordinate
2. Priority
______ are junior in claim to all other bonds and are the riskiest bond on a corporation’s balance sheet. Consequently, a(n) ______ will have a(n) ______ yield than a debenture from the same issuer.
- Subordinated Debentures
- Subordinated Debenture
- Higher
A(n) ______, like all bonds, is backed by the faith and credit of the issuer. It has also been “cosigned” by another entity, usually a parent or affiliate. It is more attractive than a regular debenture, and therefore is more marketable.
Guaranteed Bond
Guaranteed bonds generally have a(n) ______ nominal rate than other debentures.
Lower
A(n) ______ is not a secured bond; it is not backed by collateral. Rather, it is backed by two promises rather than one.
Guaranteed Bond
A(n) ______ is convertible into common stock of the issuer at the bondholder’s discretion. Conversion is optional, and the investor may choose never to convert.
Convertible Bond
The ______ is attractive to investors, who experience the best of two worlds: they currently have the safety of the bond, but if the underlying common stock rises significantly in the future, they can convert into the common stock and benefit from that future price appreciation.
Conversion Privilege
Since ______ can convert into the common stock, their price is affected by the price of the stock. If the price of the common stock rises, the ______ price will rise proportionately and vice versa.
Convertible Bond(s)
The convertible bond will have a(n) ______, which never changes, regardless of the fluctuating price of the stock.
Conversion Ratio
Number of Common Shares at Convertible Bond Conversion = ( ______ ) / ( ______ )
- Par Value
2. Conversion Price
Assume a 6%, 10-year bond can convert into the issuer’s common stock at $40 per share. How many shares of common stock will the owner have after conversion?
25 Shares
# Shares = Par Value / Conversion Price # Shares = $1,000 / $40 = 25 shares
A(n) ______, or ______, has an initial nominal rate which later increases, or “______” to a prespecified higher rate. These are typically corporate bonds, however, certain government agencies also issue them.
- Step-Up Bond
- Step Coupon Bond
- Steps Up
A bond could either have a(n) ______ coupon or interest rate, that will not change for the life of the bond and determines the income the investor will receive from the bond, or a(n) ______ rate which will fluctuate based on an index, such as LIBOR.
- Fixed
- Variable
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
A(n) ______ is the product of a debt renegotiation or a bankruptcy proceeding. When a corporation can no longer honor the terms of a bond issue, it will often renegotiate the terms of the issue with bondholders. The resulting bond is called a(n) ______, or ______.
- Income Bond
- Income Bond
- Adjustment Bond
A(n) ______ no longer pays semiannual interest, and won’t unless the issuer returns to a profitable position. Therefore, it trades without ______. These bonds are very speculative, and may not return 100% of principal at maturity.
- Income Bond
2. Accrued Interest
Income bonds are only suitable for ______ investors.
Very Aggressive
______, also known as ______ or simply ______, are considered very safe investments because they are backed by the full faith and credit of the United States government.
- U.S. Government Securities
- Treasury Securities
- Treasuries
Treasuries are highly ______; there is a vast ______ for Treasuries, with high daily trading volume and numerous investors worldwide.
- Liquid
2. Secondary Market
Interest on Treasury Securities is subject to ______ taxation only, not to ______ and ______ tax. However, just like all other bonds, ______ realized from trading Treasuries are fully taxable.
- Federal
- State and Local
- Capital Gains
The U.S. Treasury issues both ______ and ______ debt instruments.
- Marketable
2. Non-Marketable
______ securities do not trade in the secondary market and may only be redeemed by the issuer. These include stable, low-risk savings bonds, known as series bonds, and include Series EE (Which replaced Series E) and Series I, which are currently sold by the U.S. Treasury.
Nonmarketable
Series bonds must be ______ by the Treasury either through banks, or electronically if purchased a(n) ______ account online, which is an online platform that facilitates the electronic purchase and sale of U.S. Treasury securities.
- Redeemed
2. TreasuryDirect
______ securities can be traded for value in the secondary market. These include Treasury bills, notes, and bonds.
Marketable
All securities issues by the Treasury Department are issued in ______, meaning they exist only as electronic records in computers without physical certificates of ownership.
Book-Entry Form
The three marketable Treasury securities are ______, ______, and ______.
- Treasury Bills
- Treasury Notes
- Treasury Bonds
Treasury bills, or T-Bills, have the shortest maturity, a maximum of ______.
T-Notes have maturities between ______ and ______.
T-Bonds have maturities greater than ______.
- 1 Year
- 2 and 10 Years
- 10 Years
T-bills are ______ instruments, or ______. They do not have a stated interest rate and they do not pay semiannual interest. They are simply bought at a(n) ______ from par and then they mature at par. The difference between purchase price and par at maturity is the investor’s ______.
- Original Issue Discount
- OIDs
- Discount
- Interest
Treasury bills are quoted on a(n) ______, which means the quote is a discount from par value. Because the bid is a larger discount from par than the ask, a T-Bill’s published bid appears ______ than the published ask, which is a smaller discount from par than is the ask.
- Discount Yield Basis
2. Larger
A typical Treasury bill quotation appears as follows: Bid: 7.45, Ask 7.30
What are the bid and ask prices?
Bid: $925.50
Ask: $927
Bid: 7.45 / 100 = 0.0745, 0.0745 x $1,000 (par value) = $74.50, $1,000 - $74.50 = $925.50
Ask: 7.30 / 100 = 0.073, 0.073 x $1,000 (par value) = $73, $1,000 - $73.00 = $927
T-Bills are currently issued with the following maturities:
- ______
- ______
- ______
- ______
- 4 weeks (1 month)
- 13 weeks
- 26 weeks
- 52 weeks (1 year)
T-Bills are issued with a minimum denomination of ______, with ______ increments. Ownership is evidenced by ______ alone; there are no certificates issued.
- $1,000
- $1,000
- Book Entry
______ are generally book entry form, and are sold through auctions: 13- and 26- week bills are auctioned every ______ but the 52-week bills are auctioned only once a(n) ______.
- T-Bills
- Week
- Month
Treasury notes are issued with maturities of ______, ______, ______, and ______. T-Notes are issued with denominations beginning at ______.
- 2 Years
- 3 Years
- 5 Years
- 10 Years
- $1,000
Treasury notes and bonds have stated, or ______, interest (coupon) rates, pay ______ payments to their owners, and are known as ______ securities.
- Fixed
- Semiannual Interest
- Interest-Bearing
T-Notes and T-Bonds are quoted in points as a percentage of ______. The points are broken down into ______ increments and the fractional part is expressed as a decimal.
- Par
2. 1/32
Treasury bonds have maturity terms of greater than ______ at issuance and pay a(n) ______ interest rate. They are issued in ______ form. T-bonds are issued with denominations beginning at ______.
- 10 Years
- Fixed
- Book-Entry
- $1,000
A T-Bond or T-Note quote of 102.20 means ______ and ______ of par. What is the dollar value of this bond or note? ______
- 102
- 20/32
- $1,026.25
102 + 20/32 = 102.625% x $1,000 (par) = $1,026.25
Both ______ and ______ pay semiannual interest.
- Treasury Notes
2. Treasury Bonds
Another Treasury-issued security is called a(n) ______, or ______, which has its principal adjusted for inflation using the Consumer Price Index. That adjustment is taxed as ordinary income in the year that the cost basis is adjusted for inflation.
- Treasury Inflation Protected Security
2. TIPS
For TIPS, the stated interest rate is ______, but semiannual interest payments will ______ as this ______ rate is applied to the inflation-adjusted principal.
- Constant
- Fluctuate
- Constant
TIPS are issued in ______, ______, and ______ maturities.
- 5-Year
- 10-Year
- 30-Year
The U.S. Treasury also issues zero coupon bonds called ______, or ______. These are zero coupon bonds that are issued at a steep discount directly from the U.S. Treasury.
- Separately Traded Registered Interest and Principal Securities
- STRIPS
Treasury STRIPS ______ in value, meaning they gain in value every year and this gain in value is considered interest income.
Accrete
______ are zero coupons which are issued by broker/dealers, sold at a steep discount, and mature at face amount. These are an escrow receipt backed by escrowed U.S. Treasury securities.
Treasury Receipts (TRs)
Although ______ are generally AAA rated, they are not backed by the full faith and credit of the U.S. government like ______.
- Treasury Receipts (TRs)
2. Separately Traded Registered Interest and Principal Securities (STRIPS)
Below are some of the names of Treasury receipts that have been issued by broker/dealers:
- ______, certificates of accrual on treasury securities.
- ______, treasury issues GRADED rate.
- ______, program of accretion notes, treasury historic earned rate.
- ______, certificate of accretion GRADED rate.
- ______, liquid yield option notes.
All these are GRADED or ACCRETED. In other words, they are ______ or ______.
- CATS
- TIGRS
- PANTHERS
- COAGRS
- LYONS
- Original Issue Discounts (OIDs)
- Zero-Coupon Bonds
The issuance of a Treasury receipt or a STRIP would create ______, which is income that the investor is required to pay taxes on even though they have not received it. So, the ______ or gain in value on a zero coupon that is either corporate or U.S. government related is taxed annually even though the investor is will not receive the money until the bond matures.
- Phantom Income
2. Accretion
Some government agency issuers are backed by the full faith and credit of the U.S. government, such as ______ (______).
Government National Mortgage Association (GNMA)
______ have a line of credit from the U.S. Treasury, but not full backing. Examples of these include ______, ______, and ______.
- Quasi-Government Agencies
- Federal National Mortgage Association (FNMA)
- Federal Home Loan Mortgage Corporation (FHLMC)
- Student Loan Mortgage Corporation (SLMC)
GNMAs are quoted in ______, they settle ______ and there are ______ in the year and ______ in each month when computing accrued interest. The denominations are usually ______.
- 32nds
- T+2
- 360 Days
- 30 Days
- $1,000
Agency mortgage-backed securities can be purchased and sold through the ______. Because of the housing crisis that occurred in 2008, the ______ will pick primary dealers to either buy or sell mortgage-backed agency securities, such as FNMA, FHLMC, or GNMA. The primary dealers are usually large commercial banks.
- Federal Open Market Committee (FOMC)
2. Federal Reserve Board
______ provides money for student loans.
Sallie Mae (SLMC)
The majority of mortgage securities are issued and/or guaranteed by one of the following:
- An agency of the U.S. government.
- The ______, or ______ - a government-owned corporation within the Department of Housing and Urban Development, this is the only agency that is government-guaranteed.
- ______, such as the ______, or ______ (FNMA) and the ______, or ______ (FHLMC). Both are chartered by Congress, but owned by stockholders.
- Government National Mortgage Association
- Ginnie Mae (GNMA)
- Government-sponsored enterprises (GSEs)
- Federal National Mortgage Association
- Fannie Mae (FNMA)
- Federal Home Loan Mortgage Corporation
- Freddie Mac (FHLMC)
The government agencies ______ qualified mortgage loans or guarantee pools of such loans originated by financial institutions, then ______ the loans (i.e., place them in a pool and issue securities representing fractional undivided interests in the pool) and ______ the securities through the dealer community.
- Buy
- Securitize
- Distribute
Government agency securities are exempt from ______ under the Securities Act of 1933.
Registration
The ______ (______ or ______) was created as a GSE to support mortgage lending and related community investment on the part of its members, which include commercial banks, credit unions, thrift institutions, insurance companies, and certified community development institutions.
Federal Home Loan Bank System / FHLBank System / FHLBanks
The ______, or ______ (originally the Student Loan Marketing Association) originates services, and collects private education loans.
- SLM Corporation
2. Sallie Mae
______:
Function: Loan funds to Savings and Loans Institutions with S&L mortgages as collateral.
Bonds Issued: $10K or higher par value, and short-term.
Interest Paid: Semi-annually.
Federal Home Loan Bank System / FHLBank System / FHLBanks
______:
Function: Buys government guaranteed and insured mortgages, and conventional mortgages from the banks.
Bonds Issued: Conventional and short-term discount notes; $10K or higher par value bonds.
Interest Paid: Semi-annually.
Federal National Mortgage Association / Fannie Mae / FNMA
______:
Function: Buys FHA, VA, and Farmer’s Home Administration insured mortgages
Bonds Issued: Modified mortgage-backed pass-through securities; minimum $25K.
Interest Paid: Monthly.
Government National Mortgage Association / Ginnie Mae / GNMA
______:
Function: Buys conventional residential mortgages from financial institutions.
Bonds Issued: Participation certificates; pass-through securities; minimum $25K.
Interest Paid: Semi-annually.
Federal Home Loan Mortgage Corporation / Freddie Mac / FHLMC
______ are derivative securities which derive their value from an underlying pool of GNMA, FNMA, or FHLMC mortgage-backed securities. They can also be backed by pools of mortgages that are not government agency securities.
Collateralized Mortgage Obligations (CMOs)
Like all debt instruments, CMOs have ______ risk. CMOs also have uncertain maturities, due to ______ risk and ______ risk.
- Interest Rate
- Prepayment
- Extension
______ is the possibility that if interest rates fall, the CMO maturity will shorten because homeowners are more likely to refinance their homes at lower interest rates. This would cause the mortgages to be paid off early and, therefore, the CMO investor would receive principal back earlier than anticipated.
Prepayment Risk
______ is the possibility that if interest rates rise, the CMO maturity might lengthen because homeowners would be less likely to refinance. Consequently, a CMO investor would receive principal later than anticipated.
Extension Risk
CMOs provide the investor with a(n) ______ payment of both principal and interest. Because the investor is getting a portion of interest back with every payment, when the CMO ______ there are no further payments.
- Monthly
2. Matures
A CMO is divided into several slices, or ______. Each ______ is a separately traded bond with its own characteristics and risks.
- Tranches
2. Tranche
The safest and most certain tranche is called a(n) ______, which have a more certain maturity date and less prepayment and extension risk.
Planned Amortization Class (PAC)
A tranche is a separately traded bond under a Collateralized Mortgage Obligation (CMO).
The riskiest and highest yielding CMO class is the ______. This tranche receives no interest or principal until all other tranches have been paid off.
Z-Tranche
A tranche is a separately traded bond under a Collateralized Mortgage Obligation (CMO).
Another type of collateralized security is a(n) ______, which is backed by short term loans on assets other than real estate, such as auto loans or credit cards.
Asset-Backed Security (ABS)
______ are backed by a pool of debt, such as loans, bonds, or mortgages. They have a higher risk of default if they have a(n) ______, which means they have a lower priority of claim.
- Collateralized Debt Obligations (CDOs)
2. Junior Tranche
______ can be callable by the issuer if there were no longer the income stream to support it. They could also have a put feature, allowing the investor to sell it back to the issuer.
Collateralized Debt Obligations (CDOs)
______ securities, whether notes, bonds, or CDs, are based on U.S. dollars in foreign repositories, mostly European.
Eurodollar
Any entity can issue ______ securities: foreign corporations, domestic corporations, or municipalities, EXCEPT the U.S. government.
Eurodollar
Eurodollar bonds range from ______ to ______ in maturity, pay interest ______, and not subject to ______ taxes.
- 5 to 10 Years
- Once a Year
- Withholding
The Eurodollar market has the following advantages to U.S. corporations:
- No ______ risk for U.S. issuers (since bonds are denominated in U.S. dollars).
- Lower ______ in comparison with domestic rates.
- Lower ______ (no SEC registration requirements).
- Foreign Exchange
- Interest Rates
- Issuance Expenses
The U.S. cannot issue Eurodollar bonds. Therefore, they can only issue ______, which is debt issued by a country in that country’s currency.
Sovereign Debt
______ debt is generally short-term, high quality (investment grade) debt issued by corporations or municipalities.
Money Market
One common money market security is ______, which is unsecured corporate notes issued by blue chip companies.
Commercial Paper
Commercial paper has a unique rating system: ______, ______, or ______, with ______ being the highest rating.
- P-1, P-2, or P-3
2. P-1
Commercial paper has a maturity of ______ at the shortest and ______ at the longest, if exempt from registration.
- 30 Days
2. 270 Days
In addition to commercial paper, other money market instruments are ______ or government paper, and ______, which are also called ______, or ______ notes.
- T-Bills
2. Bankers’ Acceptances / Letters of Credit / Import/Export Notes
______ are collateralized paper issued for the purpose of buying and reselling securities (from T-bills to mortgages) typically overnight to provide short-term funds.
Repurchase Agreements
Because of the reciprocal agreement between the federal government and the states, interest paid on municipal bonds is never taxed at the ______ level. At the ______ level, municipal bond interest is not taxed in the ______ where it is issued. This interest IS taxed by other ______.
- Federal
- State
- State
- States
______ = Tax-Free Yield / (100% - Investor’s Tax Rate)
Tax Equivalent Yield
______ = Taxable Yield x (100% - Investor’s Tax Rate)
Tax-Free Yield
An investor is in the 30% tax bracket wants to buy a muni bond that pays 4% tax free. What is his tax equivalent yield?
5.71%
Tax Equivalent Yield = Tax-Free Yield / (100% - Investor’s Tax Rate)
4% / (100% - 30%) = 4% / 70% = 5.71%
An investor is in the 30% tax bracket wants to buy a corporate bond that pays 6%. What is his tax-free equivalent yield on a municipal?
4.20%
Tax-Free Yield = Taxable Yield x (100% - Investor’s Tax Rate)
6% x (100% - 30%) = 6% x 70% = 4.20%
When an investor buys a premium-priced municipal bond, the ______ for the bond is incrementally reduced each year until it equals par at maturity. This process is called ______.
- Book Value
2. Amortization
Purchase price minus par value equals ______.
Purchase price minus amortization equals ______.
Purchase price plus accretion equals ______.
Sale price minus book value equals ______.
- Premium
- Book Value
- Book Value
- Capital Gain or Loss
Premium divided by number of years to maturity equals ______.
Premium Amortization Per Year
An investor buys a 10-year bond at 107, or $1,070.
- What is the premium?
- What is the premium amortization per year?
- Suppose the investor sells the bond in year 5 at 106. What is the capital gain or loss?
- $70 premium
$1,070 (purchase price) - $1,000 (par value) = $70 (premium)
- $7 per year amortization
$70 (premium) / 10 years (maturity) = $7 per year amortization
- $25 capital gain
First, calculate the bond’s book value in year 5.
$7 annual amortization x 5 years = $35 total amortization
Purchase price minus amortization equals book value.
$1,070 (purchase price) - $35 (amortization) = $1,035 (book value in year five)
Sale price minus book value equals capital gain or loss.
$1,060 (sale price) - $1,035 (book value) = $25 Capital Gain
When an investor purchased a(n) ______ municipal bond, the interest is the difference between the discounted purchase price and par value which is received at maturity. Each year, the bond incrementally increases in value until its value reaches par at maturity, a process known as ______.
- Original Issue Discount (OID)
2. Accretion
If a conventional municipal bond is bought in the secondary market at a price below par, its discount is not ______. In such cases, the discount is ______. This applies to all bonds, including municipal bonds. Only municipal OIDs have ______ discount ______.
- Accreted
- Taxable
- Tax-Free
- Accretion
An investor purchases a 10-year bond issued at 60, or $600. Eventually, the investor sells the bond in year three for $800.
- What is the discount?
- What is the accretion per year?
- What is the investor’s gain or loss?
- $400 discount
$1,000 (par) - $600 (purchase price) = $400 (discount or implied interest)
- $40 per year
$400 (discount) / 10 years (maturity) = $40 per year (accretion per year)
- $80 gain on sale
$40/year (accretion) x 3 years (sold) = $120 accretion
$600 (purchase price) + $120 (accretion) = $720 book value in year three
$800 (sale price) - $720 (book value) = $80 gain on sale
Only ______ bonds, or ______ bonds, are accreted. When an investor buys a conventional municipal bond at a discount in the secondary market, cost basis will always be the ______.
- Original Issue Discount (OID)
- Zero-Coupon
- Purchase Price
When the issuer would like to reduce their cost of borrowing because interest rates have gone down or when an issuer would like to be released from a restrictive covenant, they would do so through a(n) ______.
Refunding
There are two ways ______ could occur. The first would be by issuing ______ at a lower coupon rate or without the restrictive covenant and use the proceeds to pay off the outstanding bonds. The other way would be to ______ the bonds that are currently outstanding with a new bond.
- Refunding
- New Bonds
- Exchange
The issuer sometimes attached a(n) ______ to its bond. If interest rates rise, bond prices consequently fall, frequently below par. The ______ allows the investor to sell the bond at par back to the issuer.
Put Option
The put option is an attractive feature to the ______. Consequently, a bond with a put carries a(n) ______ interest rate. Obviously, this feature adds risk to the ______.
- Bondholder
- Lower
- Issuer
Frequently, the issuer will add a(n) ______ to its bond. This gives the issuer a future refinancing option. If interest rates fall, the issuer can ______ the bonds and issue new bonds at a lower interest rate.
- Call Feature
2. Call
Bonds might have ______, which is a period during which the bond may NOT be called.
Call Protection
Bonds are commonly callable at a(n) ______ price.
Premium
When interest rates fall and an issuer wants to call or “refinance” its outstanding bond, it must wait until call protection is over. It can issue new bonds today to lock in the lower rate and store the new issue proceeds in an escrow account invested in short-term treasury or agency bonds. This process is called ______ or ______.
The old bond, which will definitely be called when the protection period ends, is now referred to as ______. It will trade as a shorter maturity bond and be sold on a(n) ______ basis. It will also be ______-rated because it is backed by escrowed funds.
For callable bonds, this process is disclosed in the ______.
- Advance Refunding
- Pre-Funding
- Defeased
- YTC
- AAA
- Covenant of Defeasance
The covenant of defeasance and put feature are contained in the ______, which is the document that states the covenants between the issuer and a trustee for the protection of the bondholders.
Bond Indenture
Another type of refunding is called ______, which is where the proceeds of the refunding issue are used to pay interest on the outstanding bonds until the bonds are called. Instead of the proceeds being used to pay off the outstanding bond, they are used to pay interest on the bond until it is called or matures.
Crossover Refunding
______ bonds are backed by full faith and credit, meaning the overall or general axing authority of the issuer. For most states, that means income and/or sales taxes. For a city or county, it means it is paid from ad valorem (property) taxes.
General Obligation (GO)
______ debt is included in the issuer’s ______, which establishes a ceiling for the total amount of ______ debt that any community or governmental unit may issue.
- General Obligation (GO)
- Debt Limit
- General Obligation (GO)
______ debt is part of total GO debt. The term refers to a situation where multiple taxing authorities in a given geographic area have the ability to tax the same real estate. An example of this is a school district that falls within a city; both authorities could tax the same residents.
Overlapping
GO debt uses ______ to make debt service payments and requires ______ approval. Debt service refers to interest and principal payments that are owed by the issuer.
- Tax Collections
2. Voter
Sometimes, a municipality will issue a(n) ______ bond. This is where the municipality will limit the amount they will raise taxes for the bond issue.
Limited Tax
Another form of GO debt is ______ debt, which is backed by both revenue collections and taxes. The revenue sources backing ______ debt are considered insecure, inadequate, or insufficient.
- Double-Barreled
2. Double-Barreled
Because of GO backing that kicks in when revenues fall short, ______ bonds can’t be marketed as revenue bonds and must be included in the ______. This also means that like other GOs, they must be underwritten by a(n) ______ process.
- Double-Barreled
- Debt Limit
- Competitive Bidding
______ bonds are self-supporting because they are backed by user fees, revenues, or special assessment that are collected from the facility or project.
Revenue
______ bonds include a bond indenture which identifies the promises made to the bondholders, and includes covenants for their protection, like rate covenants, insurance and maintenance covenants, and other protective covenants.
Revenue
______ bonds are project-centered; hospitals, toll roads, toll bridges, shipping ports, airports, and water and sewer systems, etc.
Revenue
Revenues are not backed by ______, but instead are supported by the ______. As such, revenue bonds are considered ______ safe than GO bonds.
- Full Faith and Credit
- User Fees
- Less
______ bonds are revenue bonds where the state legislative authority can appropriate money to pay off the bond issue. It is not a(n) ______ obligation; however, it is a(n) ______ obligation.
- Moral Obligation
- Legal
- Moral
You may see a(n) ______ bond for a hospital in a rural area. If the hospital were to default on their bonds and shut down, it would adversely affect the community. The state’s legislative authority may vote to appropriate money to pay off the bond issue to keep the hospital operating.
Moral Obligation
When analyzing a(n) ______, the analyst studies the debt statement which includes the overall debt for the municipality minus any self-supporting debt. The difference equals net direct debt. Then, the analyst considers any ______ or coterminous debt. This is added back to net direct debt. The sum is ______.
- General Obligation (GO)
- Overlapping
- Net Overall Debt
When analyzing a GO, the analyst also evaluates the ______ of the area, including income per capita, economic diversification, and the issuer’s ability to collect taxes. The analyst also checks ______ toward debt, and taxes (this is determined by the vote passing the bond issue).
- Demographics
2. Community Attitude
When analyzing a(n) ______ bond issue, the analyst reviews feasibility studies, competing facilities, and the debt service coverage ratio. Generally, ______ should cover the debt service by at least ______ times.
- Revenue
- Revenue
- Two
The analyst would be less concerned with the geographical location when analyzing a(n) ______ bond. When analyzing a(n) ______ bond, the analyst would be less concerned about the feasibility study.
- Revenue
2. General Obligation (GO)
Ad Valoram Taxes: \_\_\_\_\_\_ Municipal Bond Competing Facilities: \_\_\_\_\_\_ Competitive Bid: \_\_\_\_\_\_ Covenants: \_\_\_\_\_\_ Debt Coverage Ratio: \_\_\_\_\_\_ Debt Limits: \_\_\_\_\_\_ Double Barreled Bond: \_\_\_\_\_\_ Feasibility Study: \_\_\_\_\_\_ Full Faith and Credit: \_\_\_\_\_\_
Ad Valoram Taxes: GO Competitive Bid: GO Covenants: Revenue Debt Coverage Ratio: Revenue Debt Limits: GO Double Barreled Bond: GO Feasibility Study: Revenue Full Faith and Credit: GO
Income Tax: \_\_\_\_\_\_ Municipal Bond Indenture: \_\_\_\_\_\_ Insurance and Maintenance: \_\_\_\_\_\_ Limited Tax Bond: \_\_\_\_\_\_ Overlapping Debt: \_\_\_\_\_\_ Sales Tax: \_\_\_\_\_\_ Self-Supporting: \_\_\_\_\_\_ User Fees: \_\_\_\_\_\_ Voter Approval: \_\_\_\_\_\_
Income Tax: GO Indenture: Revenue Insurance and Maintenance: Revenue Limited Tax Bond: GO Overlapping Debt: GO Sales Tax: GO Self-Supporting: Revenue User Fees: Revenue Voter Approval: GO
______ bonds or ______ debt securities, if taxable, are subject to federal income tax and alternative minimum tax. Bonds issued to construct sports stadiums and parking lots are examples of taxable municipal bonds.
- Industrial Development Revenue (IDR)
2. IDR
Although Industrial Development Revenue bonds (IDRs) are municipal issues, they are often backed by a(n) ______ which pays the principal and interest. This is why they are not typically exempt from taxation at the ______ level.
- Corporation
2. Federal
IDR’s are considered ______ bonds. As such, the interest the investor receives is considered a preference item for ______ purposes.
- Private Purpose
2. Alternative Minimum Tax (AMT)
With ______, the investor must add back in certain preference items, which include private purpose municipal bond interest. If the ______ were higher than the investor’s regular taxes, the investor would be required to pay the regular taxes plus the difference.
Alternative Minimum Tax (AMT)
Every revenue bond issue has a(n) ______, which lists the ______, or rules, between the issuer and the trustee, who acts on behalf of the bondholders.
- Bond Indenture
2. Covenants
In the ______ covenant, the issuer promises to set user rates so that they are sufficient to pay interest and repay principal in the bonds.
Rate
The ______ or ______ covenant addresses the future issues of new bonds. If a(n) ______ determines that revenues from the facility are sufficient to support more new bonds, this covenant determines whether the new bonds are senior or junior to the original bonds.
- Closed-End
- Open-End
- Additional Bonds Test
A(n) ______ indenture allows additional bonds to be issued with the same lien priority using the same collateral and would require an additional bond test.
Open-End
A(n) ______ indenture results in any additional bonds being at a junior or subordinated level to the original bonds.
Closed-End
In the ______ covenant, the issuer promises to maintain the facility so that it continues to generate revenues to pay the bond holders.
Maintenance
Under the ______ covenant, if an extraordinary event (a natural disaster or condemnation) occurs, the issuer collects on an insurance policy which enables the issuer to pay off the existing bonds. Then the issuer issues new bonds to rebuild the project.
Catastrophe
Under the ______ covenant, the issuer contributes periodically to a sinking fund, which is eventually used to retire the bonds at maturity or all them earlier. The fund may only be used to retire the bonds.
Sinking Fund
The bond indenture also includes two ______ pledges indicating which items will be paid first.
Flow of Funds
If the indenture contains a(n) ______ pledge, operation and maintenance are paid first. Then debt is serviced.
Net Revenue
If the indenture contains a(n) ______ pledge, debt service on the bonds is paid first. Then operating and maintenance expenses are paid.
Gross Revenue
Because revenue bonds are self-supported and paid by user fees, oftentimes the indenture will state that a(n) ______ must be performed. This will help to determine if the issuer is using the funds appropriately.
Independent Audit
The analyst usually determines that the ______ pledge is most advantageous for bondholders. When the facility is properly maintained, it continues to produce revenues to repay the bondholders.
Net Revenue
Municipal notes, or ______, are rated by Moody’s rating service as ______, ______, or _____, with ______ being the highest. _______ is Moody’s investment (short-term) grade.
- Short-Term Munis
- MIG 1, MIG 2, MIG 3
- MIG 1
- MIG
The following are examples of municipal notes:
- ______: issued in anticipation of a future tax collection. These are MIG 1 because of their tax backing.
- ______: issued in anticipation of facility revenues.
- ______: issued in anticipation of issuing a bond in the future. These are the riskiest of the group.
- _______: issued in anticipation of future tax collection and facility revenues.
- _______: used to finance short-term needs of the municipality, such as the purchase of computers. The stated rate will actually fluctuate.
- ______: another form of financing the municipality’s short-term cash needs. With short-term _______, there is a fixed interest rate.
- _______: issued with an anticipation of receiving grant money.
- TANs (tax anticipation notes)
- RANs (revenue anticipation notes)
- BANs (bond anticipation notes)
- TRANs (tax and revenue anticipation notes)
- VRNs (variable rate notes)
- Tax-Exempt Commercial Paper
- GANs (grant anticipation notes)
______ are issued by municipalities, corporations, and certain government agencies. It is a long-term bond with an interest rate that regularly resets through a Dutch auction.
Auction Rate Securities (ARSs)
A(n) ______ starts with a high price that is reduced until a buyer consents.
Dutch Auction
Because of the regularly resetting interest rate, the ______ should trade as a short-term bond. However, ______ are not money market securities, and are not necessarily liquid.
Auction Rate Securities (ARS)
______ are taxable municipal bonds which offer either a federal subsidy to the issuer or a tax credit to the investor. They trade in the second market and are issued to fund public projects, such as highways.
Build America Bonds (BABs)
______ are used for qualified small issuers and the amount of money raised cannot exceed ______. In communities with a qualified small issuer, the local bank may deduct up to ______ of the carrying cost when investing in the bonds or when they place them in their inventory to resell to investors.
- Bank Qualified Bonds
- $10 million
- 80%
______ are financial instruments that represent a proportionate share in a specific pledged revenue stream, usually lease payments by a municipal or other government entity issuer. Unlike receiving interest on a bond, the investors receive a stream of income based on the lease revenues associated with the offering.
Certificates of Participation (COPs)
Municipal fund securities are issued by a state or local government. Therefore, they are exempt from the rules of the ______ and do not have to register with the ______. Instead, they are regulated by the ______.
- Investment Company Act of 1940
- SEC
- Municipal Securities Rulemaking Board (MSRB)
Municipal fund securities (including stocks, bonds, and government securities) are exempt from ______ taxes, and often ______ and ______ taxes, as well.
- Federal
- State
- Local
Municipal fund securities include _______, ______ for individuals with disabilities (also known as ______ plans), and ______.
- 529 College Savings Plans
- ABLE Accounts
- 592A
- Local Government Investment Pools (LGIPs)
Underwriters of primary offerings of municipal fund securities (that are not interests in LGIPs) must report information related to the offering no later than ______ following the end of each semi-annual reporting period ending on June 30 and December 31.
Performance data must be reported ______, no later than ______ following the end of the reporting period ending on December 31.
All information must be submitted ______.
- 60 Days
- Annually
- 60 Days
- Electronically
A(n) ______ is a state-sponsored, tax-advantaged education savings plan, although most states allow people living outside the state to participate.
529 Plan
Another type of 529 plan offered in some states is called a(n) ______, which are more restrictive, often requiring state residency and limiting the educational institutions that may qualify.
Prepaid Tuition Plan
In general, contributions to a 529 plan are made with ______ dollars, grow ______, and withdrawals are ______ when used for qualified education expenses.
- After-Tax
- Tax-Deferred
- Tax-Free
A(n) ______ is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.
Eligible Educational Institution
______ include tuition, mandatory fees, room and board, computers (and related equipment), and required books and supplies.
It also includes up to ______ in annual expenses for tuition related to enrollment or attendance at an elementary or secondary public, private, or religious school.
In addition, loan repayments up to a lifetime amount of ______ per individual and registered apprenticeships were recently added to the list.
- Qualified Higher Education Expenses
- $10,000
- $10,000
Nonqualified withdrawals from a 529 plan are subject to a(n) ______ and ______ on gains.
- 10% Penalty
2. Ordinary Income Tax
The primary advantage of a(n) ______ over other college saving plans is liberal contribution limits and no household income limits for participation. Additionally, the donor (owner) retains control and may move the monies between any beneficiaries in the same family.
529 Plan
While the amount of money that can be contributed to a 529 plan is not limited, the contribution is considered a(n) ______, and is subject to ______ rules.
- Gift
2. Gift Tax
Currently (2020), the gift tax limit is ______ per donor and ______ per couple.
- $15,000
2. $30,000
Most 529 plans allow account holders to make a(n) ______ of ______ with no ______ liability if there are no other contributions during that same period.
The current limits are ______ for single donors and ______ for couples in one year.
- Accelerated Gift
- 5 Years’ Worth of Contributions
- Gift Tax
- $75,000 ($15,000 x 5 years)
- $150,000 ($30,000 x 5 years)
Contributions made to Section 529 plans may be tax deductible at the ______ level.
State
There are numerous ______ fees, including those associated with enrollment, application, and annual account maintenance. In addition, investors must pay ongoing program and asset management fees. Some fees are collected by the ______ and others by the ______.
- 529 Plan
- State Sponsor
- Plan Manager
______ 529 plans, those that are purchased from a broker, are more expensive because of additional fees related to sales loads, charges at purchase and redemption, and ongoing distribution fees.
Advisor-Sold
Many states allow consumers to invest directly in 529 plans. These ______ plans are less expensive because there are no additional fees charged by the broker. Investors may also benefit from reduced administrative or maintenance fees as residents of the state sponsoring the plan, if they maintain a large balance, or participate in an automatic contribution plan.
Direct-Sold
______ allow an account holder to purchase units or credits at participating colleges and universities for future tuition and mandatory fees at current prices for the beneficiary.
Prepaid Tuition Plans
Unlike college savings plans, ______ usually cannot be used to pay for future room and board at colleges and universities and do not allow you to prepay for tuition for elementary and secondary schools.
Prepaid Tuition Plans
Most ______ are sponsored by state governments and have residency requirements for either the account holder or the beneficiary, or both. While ______ are not guaranteed by the federal government, some state governments may guarantee the money that has been paid in. If not guaranteed, the account holder could incur losses.
- Prepaid Tuition Plans
2. Prepaid Plans
If the beneficiary does not attend a participating college or university, the ______ may only pay a small return on the original investment.
Prepaid Tuition Plan
A(n) ______ is an investment pool established by a state or local government entity to invest public funds. Benefits include protection of principal and cash management. By nature, ______ are conservative due to liquidity requirements, budget constraints, legal restrictions, and limited investment options.
- Local Government Investment Pool (LGIP)
2. Public Fund Participants
______ are short-term investments with little volatility, designed to satisfy the need for funds near term, even on a daily basis.
Local Government Investment Pools (LGIPs)
The pooling of funds (LGIPs) enables participants to take advantage of ______. They also benefit from the expertise of ______ and, by extension, greater ______. Perhaps most important is the access to ______ as interest is generally allocated to the participants daily. Check writing and wire transfer features offered by most pools facilitate ______.
- Economies of Scale
- Professional Portfolio Managers
- Diversification
- Liquidity
- Cash Management
LGIPs are not required to register with the ______ and are exempt from ______ regulatory requirements for mutual funds. LGIP administrators that operate as broker/dealers are required to abide by ______ rules, specifically those related to advertising and promotional materials.
- Securities and Exchange Commission (SEC)
- SEC
- Municipal Securities Rulemaking Board (MSRB)
The LGIP’s ______ or ______ details the allowable investments. Examples include:
- Obligations issued or guaranteed by the U.S. government or related agency.
- Negotiable certificates of deposit from domestic banks.
- Commercial paper.
- Corporate notes.
- Money market mutual funds that are registered with the SEC.
- Municipal obligations issued by state and local governments.
- Investment Policy
2. Pool Offering Statement
______ (also known as ______) are savings accounts for individuals with disabilities that provide tax advantages.
- ABLE Accounts
2. 529A Accounts
A(n) ______ offers an individual with disabilities and their family a tax-advantaged way to save money for disability-related expenses. The ______ is the owner and designated beneficiary on the account.
- ABLE Account
2. Disabled Person
The annual contribution limit for an ABLE account is ______ per individual, and total contribution limits vary by state. Contributions may be made by any person, including the account beneficiary, family, and friends, using ______ dollars. Contributions are not tax deductible on the ______ level, but some states may allow for state income ______ for contributions.
- $15,000
- After-Tax
- Federal
- Tax Deductions
Earnings in an ABLE account grow ______, and withdrawals are ______ when used for qualified disability-related expenses. Money in an ABLE account can be used over the lifetime of the beneficiary as long as funds are used for ______.
- Tax Deferred
- Tax Free
- Qualified Expenses
ABLE account ______ include, but are not limited to the following:
- Education
- Housing
- Transportation
- Assistive technology
- Employment training and support
- Financial management
- Health care expenses
Qualified Expenses
Eligibility to establish an ABLE account is limited to individuals living with ______. In addition, the onset of the disability must have begun prior to ______.
- Significant Disabilities
2. Age 26
Funds in a(n) ______ are disregarded when determining eligibility for certain means-tested benefits programs, such as Medicaid and SSI. In order to maintain eligibility for SSI, a disabled person cannot have more than ______ in savings. However, the same individual can have up to ______ in a(n) ______ and still be eligible to receive SSI. The ability to receive or be eligible to receive medical assistance through Medicaid is not affected by the individual’s ______ balance.
- ABLE Account
- $20,000
- $100,000
- ABLE Account
- ABLE Account
Contributions to a(n) ______ are generally used to acquire units in a state trust and are invested consistent with the trust’s investment objectives, typically municipal fund securities.
ABLE Account
Each state establishes its own regulations to make ______ available, administers its own plan, and determines the investment options. Individuals and families can open a(n) ______ using any state’s plan; some states may offer tax benefits for those who use the plan of their home state.
ABLE Account(s)
______ underwriting involves broker/dealers acting as underwriters, but may also involve banker/dealers acting as advisers to the issuer and being paid in fees. Because of the potential for conflicts of interest, the nature of this advisory relationship is strongly dependent upon whether the underwriting was done ______ (underwriters determined by legal process) or ______ (underwriters simply selected by the issuer).
- Municipal
- Competitive Bid
- Negotiated
If the municipal underwriting is done as a(n) ______, the adviser, who is now the underwriter, must simply disclosure to any investor the involvement as bother adviser to the issuer and now as underwriter.
Competitive Bid
If the underwriting is ______, the adviser who is now participating in the underwriting must:
- Terminate as adviser in writing.
- Disclose the total compensation as both adviser and as underwriter.
- State in writing to the issuer that there is a strong potential conflict of interest in this dual capacity.
Negotiated
Disclosures in a municipal underwriting can be done in the ______ or ______ (the prospectus-like document for municipal underwriting). Additionally, the issuer will have to disclose any ______ that may exist between the underwriter and the issuer. For example, if the County accessor works for the municipal underwriter.
- Official Statement
- Preliminary Official Statement
- Control Relationship
The municipality must get a legal opinion from ______ (the issuer’s attorney). ______ will verify the issuer’s legal authority to ______, whether the bond interest is federally tax ______, and whether the bonds are exempt from registration with the _______.
- Bond Counsel
- Bond Counsel
- Issue
- Exempt
- SEC
The bond counsel legal opinion is either ______ or ______. A(n) ______ opinion is also called a(n) ______ opinion, where the issuer’s bond counsel sees no potential issues which jeopardize the bond’s status. Bond counsel issues a(n) ______ opinion if it has identified such potential issues.
- Qualified
- Nonqualified
- Nonqualified
- Clean
- Qualified
If the bond is missing its legal opinion, the bond trades ______, simply meaning the legal opinion is missing - not that the bond lacks an opinion. This is less important in today’s world because investors can visit the ______ website and look up the legal opinion on ______.
- Ex-Legal
- Municipal Securities Rulemaking Board (MSRB)
- Electronic Municipal Market Access (EMMA)
The MSRB can require distribution of the ______ as the disclosure document for investors, if there is one.
Official Statement
Most general obligation bonds underwritings are done on a(n) ______ basis, while most revenue bonds are done on a(n) ______ basis.
- Competitive Bid
2. Negotiated
Since ______ are repaid by taxes, the issuer must prove to the taxpayers that the taxpayers got the best possible value.
General Obligation (GO) Bonds
The competitive bid underwriting process starts when the issuer places an invitation to bid in the ______, where the ______ is publishes.
- Daily Bond Buyer
2. Official Notice of Sale
The ______ is the most important publication in the primary municipal market and contains information that is important to primary market participants.
Daily Bond Buyer
Some information included in the Daily Bond Buyer includes:
- The ______, which is the total number of bonds coming to market over the next 30 days.
- The ______, which is the number of bonds placed divided by the number of bonds offered over the previous week.
- The ______, which is a yield index of 25 revenue bonds with 30-year maturities.
- The ______, which is a yield index of 20 GO Bonds with 20-year maturities.
- ______ (______), an index of the average price of 40 recently issued bonds with an average maturity of 20 years.
- The ______, which is comprised of 11 GO bonds that are AA rated with 20 years to maturity and is used as a benchmark for municipal bond yields.
- 30-Day Visible Supply
- Placement Ratio
- Revdex
- G.O. Index
- Bond Buyer Municipal Bond Index (40-Bond Index)
- 11 Bond Index
______ is a wire service that provides the most up-to-date information on any news affecting the municipal industry. It is useful to ______ in structuring and pricing new issues and determining such conditions as competitive interest rates and buyer interest.
- Munifacts
2. Underwriters
Underwriters who read the ______ respond to an invitation to bid by submitting a competitive bid to the issuer. The winner is the underwriter (or syndicate) who submits the bid resulting in the lowest ______ to the issuer (the ______ is actually a superior calculation since it considers the time value of money).
- Daily Bond Buyer
- Net Interest Cost
- True Interest Cost
The municipal underwriting ______ is the compensation paid for the municipal underwriting. It is typically expressed in points, where 1 point is equal to ______. The ______ is the compensation to the syndicate members, but does not include the manager’s fee.
- Spread
- $10
- Takedown
Municipal Underwriting Formula:
Spread ______ Takedown ______ Manager’s Fee
Selling Concession ______ Additional Takedown ______ Total Takedown
Spread = Takedown + Manager’s Fee
The difference between the offered price to the institutional public and the bid price to the issuer.
Selling Concession + Additional Takedown = Total Takedown
The ______ in a corporate underwriting is called a(n) ______, and is actually part of the total takedown. The syndicate is functioning as dealer, principal and taking the risk that the underwriting will sell. Thus, the ______ is paid to each member of the syndicate according to their bracket or retention, their percentage of the underwriting.
- Additional Takedown
- Syndicate Fee
- Additional Takedown
The ______ is paid to syndicate members who sell bonds, and also to the selling group, which has a written ______.
- Selling Concession
2. Selling Group Agreement
If a(n) ______ has an 80% retention (or share of the underwriting), then they are using ______ members to sell 20% of the offering.
- Syndicate
2. Selling Group
Syndicate members receive both ______ and ______ on the bonds that they sell during the municipal underwriting. Selling group members receive the ______ only.
- Additional Takedown
- Selling Concession
- Selling Concession
Municipal bonds trade ______, which is a negotiated market.
Over-The-Counter (OTC)
Bonds are either ______ bonds or ______ bonds.
- Serial
2. Term
______ bonds quote in basis points (yield to maturity) because the bonds have different maturity dates.
Serial
______ bonds, also known as ______ bonds, quote at a percentage of par. All of the bonds mature at once and, therefore, they can be quoted as a percentage of par.
- Term
2. Dollar
Normal denominations for municipal bonds are ______ to ______ for bearer bond certificates and ______ to ______ for registered bonds. Normal trading increments would be ______.
- $1,000 to $5,000
- $1,000 to $100,000
- $5,000
Municipals pay interest ______.
Semiannually
A(n) ______ or ______ quote is for information purposes only; it is not binding.
- Bid Wanted
2. Offer Wanted
A municipal dealer will place a(n) ______ to determine possible interest in one of its inventory positions.
Bid Wanted
A municipal dealer places a(n) ______ to determine availability and price on a bond it wants to buy.
Offer Wanted
If a dealer needs to value a bond in its inventory, or if the dealer needs an estimated market price to consider a trade, the dealer will request a(n) ______ from another dealer. A(n) ______ is not a binding quote; it is simply an estimate.
Working / Workable Indication
When a dealer gives a(n) “______”, it has given a firm quote which is good for a specific time period (usually an hour). However, the dealer reserves the right to accelerate the deadline to 5 minutes.
Out Firm, With Five Minute Recall
The MSRB requires dealers to price municipal bonds ______ in light of ______. However, there is no 5% markup guideline.
- Reasonably
2. Current Market Conditions
The ______ is the MSRB system in which dealers report the sale and purchase of municipal bonds. This system helps provide ______ into the municipal trading market to the public.
- Real-Time Transaction Reporting System (RTRS)
2. Transparency
______ is an electronic system which provides information on municipal issuers to public customers as well as to professionals.
Electronic Municipal Market Access (EMMA)
______ includes copies of the official statements as well as last trade information. ______’s objective is to provide the most current information, thereby promoting transparency in the municipal marketplace.
Electronic Municipal Market Access (EMMA)
The ______ provides industry professionals and public investors with last trade information about instruments with short-term rates. This information is based on input from at least ______ who access ______ through a password-protected website.
- Short-Term Obligation Rate Transparency (SHORT) System
- 3 Professionals
- SHORT
Investors who are looking for a stable income stream may want to consider investing in a(n) ______ or ______ because these items pay interest semiannually.
- Debt Instrument
2. Bond
Investors who have a set period of time to invest their money and are concerned about reinvestment risk may want to consider ______. These items are purchased at a discount and matures to its face amount, therefore locking in an investment return.
Zero-Coupon Bonds
Conservative investors may want to consider a(n) ______, ______, or ______, because these are considered the safest of all debt securities.
- U.S. Government Bond
- Note
- Bill
Investors looking for tax relief may want to consider a(n) ______ for interest that is tax exempt at the federal, and possibly state, level.
Municipal Bond
Investors looking for a better rate of return from their debt instruments may want to consider ______.
Corporate Bonds
