Chapter 7: Types of Debt Instruments Flashcards
Debt Instrument
Tool used by an entity or corporation to raise its capital
Long-Term Debt Instruments
Debentures, bonds, mortgages, and long-term loans
Middle or Short-Term Debt Instruments
Working capital loans and treasury bills
Treasury Bills (T-Bills)
Short-term government debt obligations backed by the Treasury Department with a maturity of one year or less
T-Bills are intended to do what?
Meet temporary liquidity shortfalls and their maximum validity is 364 days from the issue date
Treasury Notes (T-Notes)
Tradeable obligations of the government that provide steady interest rates and terms of two to ten years
Who oversees the issuance of Treasury Securities?
Bureau of the Fiscal Service
T-Notes are issued in maturities of how many years?
2, 3, 5, 7, and 10
Treasury Bonds (T-Bonds)
Fixed-rate government debt securities with a maturity range between 10 and 30 years, earn periodic interest until their maturity
T-Bonds are considered to be what kind of securities?
Government-issued, risk-free
Treasury Inflation-Protected Securities (TIPS)
Marketable treasury securities that match their principal value and interest payments to protect against inflation
TIPS are an attractive option to investors because why?
Guaranteed return
TIPS Maturity Levels
5, 10, or 30 years
What is unique about TIPS interest rate risk?
Investors can lose interest earned and the interest is taxable, paid every 6 months until maturity
Treasury Separate Trading of Registered Interest and Principal Securities (T-STRIPS)
Bonds in which the principal and coupon payments are traded as separate securities
T-STRIPS are purchased from whom?
Brokerages and institutions
What are some advantages to T-STRIPS?
Financial institutions can create default risk-free securities because they are backed by the government and are safe investment options
Auction
Transaction where potential buyers engage in competitive bidding to acquire an asset
What is the primary objective of an auction?
Secure the most favorable financial outcome for the property owner and foster an environment of open and equitable competition among the bidders
What are some types of auctions?
Absolute, Preserve, Minimum bid, Multi-parcel, and Sealed bid
Agency Security
Debt obligation issued by a US government-sponsored enterprise (GSE) or other federal related entity
What are some examples of Agency Securities?
Federal National Mortgage Association (FNMA), Federal Home Loan Bank, Federal Home Lona Mortgage Association (FNMA), and Student Loan Marketing Association (SLMA)
Government-Sponsored Enterprises (GSE)
Quasi-governmental entities established to enhance the flow of credit to specific sectors of the American economy
Federal Government Agency Securities are issued by whom?
Federal Housing Administration (FHA) and the Small Business Administration (SBA)
Who is the most common issuer of Federal Government Agency Securities?
Government National Mortgage Association (GNMA)
Federal Government Agency Securities provide what?
Regular interest payments to the investors and when the bond matures, the bondholder receives the full face value
Federal Farm Credit Banks (FFCB)
Widespread network of cooperative financial institutions owned by their borrowers; institutions that have a government-sponsored mandate to support rural and agricultural businesses
What is the primary objective of the FFCB?
Provide dependable and consistent credit and financial services to rural communities and the agriculture sector
The Federal Land Banks specialize in what?
Providing farmers with long-term real estate loans
The Federal Intermediate Credit Banks focus on what?
Discounting short-term loans issued by commercial banks
The Production Credit Association offers farmers what?
Short- and intermediate-term loans
Mortgage-Backed Securities are considered what?
Collateral to an asset and secured by a bundle of home loans
What is the process of Mortgage-Backed Securities?
Aggregation of mortgages and their subsequent sale to a group who then turns them into an investable security
Municipal Bond
Fixed-income debt security issued by a governmental entity to fun public projects
Private Activity Bonds
Issued for the benefit of private entities even though the issuance is done by a governmental entity
Municipal bonds allow investors to lend money to local governments to do what?
Fund daily operations as well as public works projects, such as road construction, improvements to schools and hospitals, etc.
What is an example of a municipal bond construction?
Golden Gate Bridge
Revenue Bonds
Help finance projects
General Obligation Bonds are issued by whom?
States, counties, and special districts
A revenue bonds is a type of what kind of bond?
Municipal
Repayment of revenue bond obligation is primarily guaranteed by what?
Operations revenue of an entity
Transportation Revenue
Comes from transit fares, tolls, and other user fees related to transportation services
Transportation Revenue: Own-Source Revenue
Revenue accrued from transportation-specific taxes and tariffs applied directly to transportation related activities
Transportation Revenue: Own-Source Revenue Examples
Fuel taxes, property taxes, income or corporate taxes, vehicle license fees, violation tickets, fines, and investment income
Transportation Revenue: Revenue Directed to Other Uses
Includes funds that are raised from transportation related activities but used to finance programs unrelated to transportation services
Transportation Revenue: Supporting Revenue
Includes funds that are collected from non-transportation related activities but are dedicated to supporting transportation programs
Special Tax Bond
Repaid through revenues derived from taxes imposed on existing activities or assets
Special Tax Bonds are what kind of security?
Hybrid, general obligation and revenue bonds
Special Tax Bonds are issued by the government to fund diverse community projects, such as?
Highway construction, development of sewage systems, and establishment of healthcare facilities
Special Assessment Bond
Relies on revenue generated from an incremental tax imposed directly on residents who benefit from a specific project
Double-Barreled Bond
Municipal bond where the repayment of interest and principal is guaranteed by two separate entities
Specifically what kind of revenue do Double-Barreled Bonds rely on?
Designated project and financial capacity of the bond issuer and its taxing authority
Moral Obligation Bond
Revenue bond issued by a municipality or local government that includes a moral, but not legally-binding commitment to avoid default risk on payments
Private Activity Bond (PAB)
Allows private entity to secure funding for a variety of projects, which may include highways and freight transfer
Exempt Facility Bonds finance what?
Projects such as water or sewer facilities, airports, and residential rental properties
Qualified Mortgage Bonds finance what?
First-time home buyers through low interest mortgage loans
Qualified 501(c)(3) Bonds finance what?
Nonprofit organizations and access to tax-exempt finances for eligible projects
Qualified Redevelopment Bonds finance what?
Redevelopment efforts in economically distressed areas
Industrial Development Bonds (IDB)
Tax-exempt securities issued by government agencies to provide money for acquisition, construction, manufacturing, rehabilitation, and processing facilities for private sector companies
Small-Issue IDB
Range from $1-10 million
Exempt-Facility IDB
No size limit but must be used for specific business
Municipal Note
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
Tax Anticipation Notes (TAN)
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
Revenue Anticipation Notes (RAN)
Short-term debt commonly utilized by government issuers; repaid within one-year time frame using revenue generated from a specific, named source
Grant Anticipation Notes (GAN)
Short-term municipal financing; issued with expectation of receiving grants, which usually come from the federal government or its agencies
What are the 3 major rating agencies for Municipal Notes?
Moody’s Investor Services; S&P Global Ratings; Fitch Ratings
Municipal Bond Underwriting
Process of purchasing a new issue of municipal securities from the issuing entity and reselling them to investors
Competitive Municipal Bond Underwriting
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
Negotiated Municipal Bond Underwriting
Underwriter or group of underwriters negotiates directly with the issuer to discuss the interest rate and other specifications regarding the selling of the bond
Corporate Bonds
Securities issued by a corporation
Secured Bonds
Offer specific collateral, such as property or assets owned by the company, as security for the bond
Mortgage Bonds
Pledge specific property
Equipment Trust Certificates
Permit a company to acquire and derive benefits from an asset while making incremental payments over a duration
Collateral Trust Bonds
Include debt that is secured with financial collateral
Unsecured Bonds
Not backed by any specific asset or collateral; instead, they are backed by the general creditworthiness and reputation of the issuing company
Debentures
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
Subordinated Debentures
Unsecured loans or bonds that rank below other securities with respect to asset claims or borrower earnings
Liquidation
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
Creditors’ Voluntary Liquidation (CVL)
Provides a mechanism for directors or owners to close an insolvent company
Members’ Voluntary Liquidation
Occurs when a company is solvent and can pay all its liabilities
Compulsory Liquidation
Creditors appeal to the court to dissolve the firm, as they believe that the company is unable to pay its debts
Secured Creditors
Hold a lien on their debtor’s property; have a security interest in the company’s assets, such as a mortgage
Administrative Expense Claims
Reflect the actual and necessary costs of preserving the bankruptcy estate after the bankruptcy petition filing
General Creditors
Person or organization that lends money without a secured interest in the borrower’s assets
Subordinated Creditors
Individual or company ranked below senior creditors in claiming debts from a debtor
Preferred Stockholders
Enjoy priority of a company’s earnings; distinct class of shares that grants holders more privilege compared to common stock
Common Stockholders
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
Income Bonds
Principal value is promised and interest or coupon payments are contingent upon the issuer’s income
Eurodollar Bonds
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
Yankee Bonds
Bonds that are issued by a non-US entity in the United States and are traded in US dollars
Eurobonds
International bond that is denominated in a currency different from the country where it is issued
What are benefits of Eurobonds?
Allows opportunities for overseas investments without leaving one’s home country; quite affordable, with small denomination, and possess high liquidity
What are disadvantages of Eurobonds?
Vulnerable to political and economic risks within each country; susceptible to exchange rate fluctuations and are not regulated in their home country
Money Market Instruments
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