Corporate and US Government Debt Securities

Question 1

Types of High Quality Debt maturing in less than 12 months include…

Answer 1

Commercial Paper, Money Markets, Certificate of Deposits (CDs)

Question 2

True or False: Commercial Paper is issued at a discount.

Answer 2

True

Question 3

True or False: All <12month HQ Debt is issued at a discount.

Answer 3

False: CDs are NOT issued at a discount, Commercial Paper and Money Markets are always issued at a discount

Question 4

Max Maturity of <12month HQ Debt is…

Answer 4

270 days

Question 5

True or False: Eurodollar Bonds contain Currency Risk

Answer 5

False: They do NOT contain Currency Risk

Question 6

One of the main differences between a Eurodollar Bond and Eurobond is that…

Answer 6

Eurobond contains Currency Risk, while Eurodollar Bonds do not

Question 7

Call Risk is associated with AN INCREASING / A DECLINING interest rate environment.

Answer 7

DECLINING interest rate environment
(remember: if interest rates decline, companies/municipalities are more likely to call back their bonds)

Question 8

Bonds in general innately contain which kinds of risk?

Answer 8

Credit Risk and Interest Rate Risk
(remember: Credit Risk = ability for companies/municipalities to pay back, and Interest Rate Risk = yield of bond is dependent on interest rate fluctuations)

Question 9

ETNs

Answer 9

Exchange-Traded Notes - Debt instrument where the holder is a creditor or sponsor

Question 10

Sovereign Bonds and other non-US market securities have which kinds of risk?

Answer 10

Default Risk and Currency Risk
(remember: Default Risk = company/municipality cannot pay back, and Currency Risk = yield and payout of bond is dependent on the currency exchange rate)

Question 11

What is the value of all yields when a bond is issued at par?

Answer 11

Par = Nominal Yield (NY) = Current Yield (CY) = Yield to Maturity (YTM) = Yield to Call (YTC)

Question 12

Seesaw Method

Answer 12

Yield table for bonds
If bond is issued at a discount, NY < CY < YTM < YTC (NY is the lowest, YTC is the highest)
If bond is issued at a premium, NY > CY > YTM > YTC (YTC is the lowest, NY is the highest)

Question 13

YTW

Answer 13

Yield to Worst - the LOWEST yield a customer can expect
(remember: dpeneding on what the bond is issued at, YTW will depend based on the Seesaw Method)

Question 14

Inverse Relationship of Bonds (per Seesaw Method)

Answer 14

If bond is issued at a DISCOUNT, interest rates have gone UP
If bond is issued at a PREMIUM, interest rates have gone DOWN

Question 15

If a bond is issued at par or discount, we will quote…

Answer 15

YTM

Question 16

If a bond is issued at a premium, we will quote…

Answer 16

YTC

Question 17

Current Yield [equation]

Answer 17

Annual Interest / Current Market Price

Question 18

True or False: Investment Grade Bonds (per S&P scaling) are bonds that are BB and above

Answer 18

False: BBB and above; Bonds below BBB are NOT considered Investment Grade

Question 19

OID Rules

Answer 19

Original Issue Discount - If a bond is issued at a discount, it follows OID Rules which implies the bond will have a straight line ammortization with UPWARD accretion
(ie. If a bond is issued at $98, you will receive $100 if held until maturity)

Question 20

The two types of Corporate Bonds include…

Answer 20

Secured Bonds and Unsecured Bonds

Question 21

True or False: Secured Bonds are senior to unsecured bonds

Answer 21

True

Question 22

Equipment Trust Certificates are secured by…

Answer 22

Real Property
(ie. Major/Movable Equipment)

Question 23

Debenture

Answer 23

A type of Unsecured Bond that is covered by the full faith and credit of the issuer

Question 24

Subordinated Debenture

Answer 24

A debenture where you will put your claim behind the regular debenture holder

Question 25

Step Coupon Bonds

Answer 25

Issuer will agree to pay you a range % throughout the life of the Bond

Question 26

True of False: Accretion’s “phantom income” is not taxable

Answer 26

False: Phantom Income IS taxable
(remember: ALL paid income is taxable)

Question 27

Zero-Coupon Bonds are CALLABLE / NOT CALLABLE

Answer 27

NOT CALLABLE

Question 28

True or False: Zero-Coupon Bonds are not subject to Call Risk

Answer 28

True
(remember: Zero-Coupon Bonds are NOT CALLABLE, therefore do not have Call Risk)

Question 29

True or False: Zero-Coupon Bonds are not volatile investments

Answer 29

False: Zero-Coupon Bonds are very volatile - dependent on interest rates
(remember: no coupon means that the value is heavily dependent on interest rates per Seesaw Method)

Question 30

Calculating Parity [equation]

Answer 30

1) When given the Conversion Price, you need to establish the Conversion Ratio
Par / Conversion Price = Conversion Ratio
(remember: Par of Bonds = $1,000, Par of Preferred Stocks = $100)
2) When given the Current Market Price/Share, determine Parity of Bond
Conversion Ratio * Price/Share = Parity of Bond
(remember: Parity = Equal!!!)

ie Bond’s conversion price to stock is $40 and Current Market Price/Share is $50. Find Parity of the Bond
1) $1,000 / $40 = 25 shares
2) 25 shares * $50 = $1,250 (Parity)

Question 31

Income Bonds

Answer 31

Pay interest when and if earned “trading flat” - usually issued during bankruptcies and restructuring
(remember: you need INCOME when you don’t have any income…)

Question 32

Arbitrage

Answer 32

Profiting from price discrepancies

Question 33

CMOs

Answer 33

Collateralized Mortgage Obligations - broken up into Planned Amortization Classes (PACs) and Target Amortization Classes (TACs)