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SIE Exam 2024 > Chapter 7: Types of Debt Instruments > Flashcards

Chapter 7: Types of Debt Instruments Flashcards

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SIE Exam flashcards
1
Q

Debt Instrument

A

Tool used by an entity or corporation to raise its capital

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2
Q

Long-Term Debt Instruments

A

Debentures, bonds, mortgages, and long-term loans

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3
Q

Middle or Short-Term Debt Instruments

A

Working capital loans and treasury bills

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4
Q

Treasury Bills (T-Bills)

A

Short-term government debt obligations backed by the Treasury Department with a maturity of one year or less

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5
Q

T-Bills are intended to do what?

A

Meet temporary liquidity shortfalls and their maximum validity is 364 days from the issue date

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6
Q

Treasury Notes (T-Notes)

A

Tradeable obligations of the government that provide steady interest rates and terms of two to ten years

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7
Q

Who oversees the issuance of Treasury Securities?

A

Bureau of the Fiscal Service

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8
Q

T-Notes are issued in maturities of how many years?

A

2, 3, 5, 7, and 10

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9
Q

Treasury Bonds (T-Bonds)

A

Fixed-rate government debt securities with a maturity range between 10 and 30 years, earn periodic interest until their maturity

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10
Q

T-Bonds are considered to be what kind of securities?

A

Government-issued, risk-free

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11
Q

Treasury Inflation-Protected Securities (TIPS)

A

Marketable treasury securities that match their principal value and interest payments to protect against inflation

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12
Q

TIPS are an attractive option to investors because why?

A

Guaranteed return

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13
Q

TIPS Maturity Levels

A

5, 10, or 30 years

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14
Q

What is unique about TIPS interest rate risk?

A

Investors can lose interest earned and the interest is taxable, paid every 6 months until maturity

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15
Q

Treasury Separate Trading of Registered Interest and Principal Securities (T-STRIPS)

A

Bonds in which the principal and coupon payments are traded as separate securities

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16
Q

T-STRIPS are purchased from whom?

A

Brokerages and institutions

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17
Q

What are some advantages to T-STRIPS?

A

Financial institutions can create default risk-free securities because they are backed by the government and are safe investment options

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18
Q

Auction

A

Transaction where potential buyers engage in competitive bidding to acquire an asset

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19
Q

What is the primary objective of an auction?

A

Secure the most favorable financial outcome for the property owner and foster an environment of open and equitable competition among the bidders

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20
Q

What are some types of auctions?

A

Absolute, Preserve, Minimum bid, Multi-parcel, and Sealed bid

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21
Q

Agency Security

A

Debt obligation issued by a US government-sponsored enterprise (GSE) or other federal related entity

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22
Q

What are some examples of Agency Securities?

A

Federal National Mortgage Association (FNMA), Federal Home Loan Bank, Federal Home Lona Mortgage Association (FNMA), and Student Loan Marketing Association (SLMA)

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23
Q

Government-Sponsored Enterprises (GSE)

A

Quasi-governmental entities established to enhance the flow of credit to specific sectors of the American economy

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24
Q

Federal Government Agency Securities are issued by whom?

A

Federal Housing Administration (FHA) and the Small Business Administration (SBA)

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25
Q

Who is the most common issuer of Federal Government Agency Securities?

A

Government National Mortgage Association (GNMA)

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26
Q

Federal Government Agency Securities provide what?

A

Regular interest payments to the investors and when the bond matures, the bondholder receives the full face value

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27
Q

Federal Farm Credit Banks (FFCB)

A

Widespread network of cooperative financial institutions owned by their borrowers; institutions that have a government-sponsored mandate to support rural and agricultural businesses

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28
Q

What is the primary objective of the FFCB?

A

Provide dependable and consistent credit and financial services to rural communities and the agriculture sector

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29
Q

The Federal Land Banks specialize in what?

A

Providing farmers with long-term real estate loans

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30
Q

The Federal Intermediate Credit Banks focus on what?

A

Discounting short-term loans issued by commercial banks

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31
Q

The Production Credit Association offers farmers what?

A

Short- and intermediate-term loans

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32
Q

Mortgage-Backed Securities are considered what?

A

Collateral to an asset and secured by a bundle of home loans

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33
Q

What is the process of Mortgage-Backed Securities?

A

Aggregation of mortgages and their subsequent sale to a group who then turns them into an investable security

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34
Q

Municipal Bond

A

Fixed-income debt security issued by a governmental entity to fun public projects

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35
Q

Private Activity Bonds

A

Issued for the benefit of private entities even though the issuance is done by a governmental entity

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36
Q

Municipal bonds allow investors to lend money to local governments to do what?

A

Fund daily operations as well as public works projects, such as road construction, improvements to schools and hospitals, etc.

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37
Q

What is an example of a municipal bond construction?

A

Golden Gate Bridge

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38
Q

Revenue Bonds

A

Help finance projects

39
Q

General Obligation Bonds are issued by whom?

A

States, counties, and special districts

40
Q

A revenue bonds is a type of what kind of bond?

A

Municipal

41
Q

Repayment of revenue bond obligation is primarily guaranteed by what?

A

Operations revenue of an entity

42
Q

Transportation Revenue

A

Comes from transit fares, tolls, and other user fees related to transportation services

43
Q

Transportation Revenue: Own-Source Revenue

A

Revenue accrued from transportation-specific taxes and tariffs applied directly to transportation related activities

44
Q

Transportation Revenue: Own-Source Revenue Examples

A

Fuel taxes, property taxes, income or corporate taxes, vehicle license fees, violation tickets, fines, and investment income

45
Q

Transportation Revenue: Revenue Directed to Other Uses

A

Includes funds that are raised from transportation related activities but used to finance programs unrelated to transportation services

46
Q

Transportation Revenue: Supporting Revenue

A

Includes funds that are collected from non-transportation related activities but are dedicated to supporting transportation programs

47
Q

Special Tax Bond

A

Repaid through revenues derived from taxes imposed on existing activities or assets

48
Q

Special Tax Bonds are what kind of security?

A

Hybrid, general obligation and revenue bonds

49
Q

Special Tax Bonds are issued by the government to fund diverse community projects, such as?

A

Highway construction, development of sewage systems, and establishment of healthcare facilities

50
Q

Special Assessment Bond

A

Relies on revenue generated from an incremental tax imposed directly on residents who benefit from a specific project

51
Q

Double-Barreled Bond

A

Municipal bond where the repayment of interest and principal is guaranteed by two separate entities

52
Q

Specifically what kind of revenue do Double-Barreled Bonds rely on?

A

Designated project and financial capacity of the bond issuer and its taxing authority

53
Q

Moral Obligation Bond

A

Revenue bond issued by a municipality or local government that includes a moral, but not legally-binding commitment to avoid default risk on payments

54
Q

Private Activity Bond (PAB)

A

Allows private entity to secure funding for a variety of projects, which may include highways and freight transfer

55
Q

Exempt Facility Bonds finance what?

A

Projects such as water or sewer facilities, airports, and residential rental properties

56
Q

Qualified Mortgage Bonds finance what?

A

First-time home buyers through low interest mortgage loans

57
Q

Qualified 501(c)(3) Bonds finance what?

A

Nonprofit organizations and access to tax-exempt finances for eligible projects

58
Q

Qualified Redevelopment Bonds finance what?

A

Redevelopment efforts in economically distressed areas

59
Q

Industrial Development Bonds (IDB)

A

Tax-exempt securities issued by government agencies to provide money for acquisition, construction, manufacturing, rehabilitation, and processing facilities for private sector companies

60
Q

Small-Issue IDB

A

Range from $1-10 million

61
Q

Exempt-Facility IDB

A

No size limit but must be used for specific business

62
Q

Municipal Note

A

Short term dept issued by state and local governments; Used to provide interim financing before longer-term bonds are issued or if irregular cash flows need to be covered

63
Q

Tax Anticipation Notes (TAN)

A

Short-term debt security issued by a state or local government to raise money for a public project; debt is repaid with future tax collections

64
Q

Revenue Anticipation Notes (RAN)

A

Short-term debt commonly utilized by government issuers; repaid within one-year time frame using revenue generated from a specific, named source

65
Q

Grant Anticipation Notes (GAN)

A

Short-term municipal financing; issued with expectation of receiving grants, which usually come from the federal government or its agencies

66
Q

What are the 3 major rating agencies for Municipal Notes?

A

Moody’s Investor Services; S&P Global Ratings; Fitch Ratings

67
Q

Municipal Bond Underwriting

A

Process of purchasing a new issue of municipal securities from the issuing entity and reselling them to investors

68
Q

Competitive Municipal Bond Underwriting

A

Multiple underwriters or groups of underwriters participate by submitting bids to the issuers; bids provide recommendations regarding the coupons and yields at which new bonds can be sold

69
Q

Negotiated Municipal Bond Underwriting

A

Underwriter or group of underwriters negotiates directly with the issuer to discuss the interest rate and other specifications regarding the selling of the bond

70
Q

Corporate Bonds

A

Securities issued by a corporation

71
Q

Secured Bonds

A

Offer specific collateral, such as property or assets owned by the company, as security for the bond

72
Q

Mortgage Bonds

A

Pledge specific property

73
Q

Equipment Trust Certificates

A

Permit a company to acquire and derive benefits from an asset while making incremental payments over a duration

74
Q

Collateral Trust Bonds

A

Include debt that is secured with financial collateral

75
Q

Unsecured Bonds

A

Not backed by any specific asset or collateral; instead, they are backed by the general creditworthiness and reputation of the issuing company

76
Q

Debentures

A

Debt instruments that can be used by governments, companies, and organizations for the purpose of issuing a loan; Contain a contract for repayment of the principal amount on or before the specified date

77
Q

Subordinated Debentures

A

Unsecured loans or bonds that rank below other securities with respect to asset claims or borrower earnings

78
Q

Liquidation

A

Process by which a company is brought to its end and the assets and property of the company are redistributes to the creditors and owners

79
Q

Creditors’ Voluntary Liquidation (CVL)

A

Provides a mechanism for directors or owners to close an insolvent company

80
Q

Members’ Voluntary Liquidation

A

Occurs when a company is solvent and can pay all its liabilities

81
Q

Compulsory Liquidation

A

Creditors appeal to the court to dissolve the firm, as they believe that the company is unable to pay its debts

82
Q

Secured Creditors

A

Hold a lien on their debtor’s property; have a security interest in the company’s assets, such as a mortgage

83
Q

Administrative Expense Claims

A

Reflect the actual and necessary costs of preserving the bankruptcy estate after the bankruptcy petition filing

84
Q

General Creditors

A

Person or organization that lends money without a secured interest in the borrower’s assets

85
Q

Subordinated Creditors

A

Individual or company ranked below senior creditors in claiming debts from a debtor

86
Q

Preferred Stockholders

A

Enjoy priority of a company’s earnings; distinct class of shares that grants holders more privilege compared to common stock

87
Q

Common Stockholders

A

Have at least one common share of a company; have voting rights, but they’re not prioritized regarding the right to dividends or assets in the case of the firm’s liquidation

88
Q

Income Bonds

A

Principal value is promised and interest or coupon payments are contingent upon the issuer’s income

89
Q

Eurodollar Bonds

A

Pay interest and principal in the US dollars and are issued outside the US; bonds are internationally traded and can be issued by various entities, including US corporations

90
Q

Yankee Bonds

A

Bonds that are issued by a non-US entity in the United States and are traded in US dollars

91
Q

Eurobonds

A

International bond that is denominated in a currency different from the country where it is issued

92
Q

What are benefits of Eurobonds?

A

Allows opportunities for overseas investments without leaving one’s home country; quite affordable, with small denomination, and possess high liquidity

93
Q

What are disadvantages of Eurobonds?

A

Vulnerable to political and economic risks within each country; susceptible to exchange rate fluctuations and are not regulated in their home country

94
Q

Money Market Instruments

A

Covers trading of significant quantities of short-term debt instruments, such as commercial paper or overnight reserves; regarded as excellent avenue for investing in highly liquid assets

SIE Exam 2024 (20 decks)

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