Chapter 7: Fixed-Income Securities Flashcards
fixed-income securities
a debt instrument that pays interest for a period of time and then repays the face value at maturity.
Examples of fixed-income securities
bonds
commercial paper
certificates of deposit
mortgage-backed securities
what are the two largest markets for fixed-income securities?
US Treasury bonds and mortgage-related bonds.
When would “calling a bond” benefit the security issuer?
when interest rates have declined.
what is commerical paper?
short-term debt issued by corporations
what kind of risk does commercial paper carry?
default risk
what do banks use REPOs for?
to borrow from another bank to maintain the required cash reserves.
what is the coupon rate of a bond?
the annual rate of interest paid on the face value
what is the yield to maturity of a bond?
the internal rate of return (IRR) on the cash flows received by the investor.
Secured Bonds
bonds that are backed by collateral
zero-coupon bonds
bonds that do not make regular interst payments. matures at face value
convertible bonds
bond can be converted into equity
call provision
feature for the issuer to call back the bond before maturity
puttable bond
enables the bond owner to sell (put) the bond back to the issuer at a predetermined price and time.
when is a puttable bond beneficial for the security holder?
when interest rates rise.
serial bond
bond with multiple maturity dates.
when a bond’s price is more than its par value… (3)
- the bond is selling at a premium
- the coupon rate is higher than current interest rates.
- callable bonds are likely to be called
when a bond’s price is less than its par value…
- the bond is selling at a discount
- the coupon rate is lower than current interest rates.
- puttable bonds are likely to be put.
STRIPS
the government “strips” principal and coupon out of a treasury bond and sells it as a series of zero-coupon bonds.
TIPS
treasury inflation protected securities
what do US Savings Bonds enable?
permit smaller investors to acquire interest in government debt instruments, and in some cases allow for preferable tax treatment.
the two main types of US Savings Bonds
EE and I bonds
I Bonds
US Savings Bonds that are adjusted for inflation
interest received from private purpose municipal bonds…
are subject to AMT (alternative minimum tax)
Tax Equivalent Yield calculation
Tax Exempt Yield
/
(1 - marginal tax rate)
After-Tax Return calculation
Taxable Return * (1 - marginal tax rate)
main risks for Collateralized Mortgage Obligations (CMOs)
- interest rate risk
- default risk
- prepayment risk
what is the normal fraction use for treasury security prices?
1/32
Treasury bills (TBILLS) and Treasury Bonds are exempt from which type of taxation?
State income tax
what is default risk also known as?
credit risk
Treasury bills (TBILLS) and Treasury Bonds are subject which type of taxation?
Federal
are coupon bonds subject to OID?
NO
Regarding competitive bids
the competitive bid determines the yield at auction
Regarding non-competitive bids
the yield on the non-competitive bid is not guaranteed, instead, the competitive bidders are the ones to determine the yield.
