Debt

Question 1

What is a mortgage bond backed by

Answer 1

Backed by real estate

Question 2

What is a collateral trust bond backed by?

Answer 2

Backed by other securities the issuer owns (e.g. government debt)

Question 3

What is an equipment trust certificate backed by?

Answer 3

Backed by equipment in the issuers business, most commonly rolling stock (rail road cars, etc.)

Question 4

Subordinated debenture

Answer 4

paid last of all debts if the issuer defaults

Question 5

Guaranteed bond

Answer 5

Unsecured debt security that is guaranteed by a third party (usually parent company guarantees subsidiary’s debt)

Question 6

Is an income bond suitable for investors seeking income?

Answer 6

No, since it only pays interest if issuer makes a profit

Question 7

T/F: Zero coupon bonds are issued at a discount

Answer 7

True, issued at a discount

Question 8

T/F: zero coupon bonds have high price sensitivity to interest rate movements

Answer 8

True

Question 9

When bonds issued at a discount must be accrued, is cost basis adjusted up or down?

Answer 9

Adjusted up

Cost basis adjusted up when bonds accreted

Question 10

Treasury receipts are issued at a discount and backed by

Answer 10

Backed by broker dealers

Not US gov

Question 11

T/F: T-Bills have a maturity date of 1-10 years

Answer 11

False, they mature in 1 year or less

Maturities range from a few days to 1 yr. Longer the maturity date, higher the interest payment

Question 12

Is interest on T-Bills taxable at the state and local level?

Answer 12

No

Interest on all US Treasury securities is taxable only at federal level

Question 13

T/F: Interest on all US treasury securities is taxable only at federal level

Answer 13

True, taxable only at federal. Not state and local

Question 14

Are T-Notes a money market instrument?

Answer 14

No

Money market instruments mature in 1 year or less. T Notes are 2-10 years

Question 15

Do Government National Mortgage Association (GNMA, Ginnie Mae) pass through certificates trade on NYSE?

Answer 15

No

The pass through certificates trade OTC

Question 16

T/F: In most cases, interest on zero coupon bonds is accreted and taxed annually even though its not received until maturity

Answer 16

True

Accreted and taxed annually

Question 17

T/F: STRIPS and Treasury Receipts and both direct obligations of the US gov

Answer 17

False

STRIPS are issued directly by gov and are direct obligations

Treasury Receipts are issued by investment bankers and are not direct obligations of US gov

Question 18

How are T-Bills quoted

Answer 18

Annualized % discount from par

Example: T Bill quoted @ 1.3%
$1000 par * 0.013 = $13
$1000 - $13 = $987
Price is $987

Question 19

How are T-Notes and T-Bonds quoted?

Answer 19

% of par in 32nds

Example: T Note quoted @ 94.08
94% + 8/32%
94% + .025% = 94.25%
$1000 * .9425 = $942.50

Question 20

How often do investors in GNMA pass through certificates receive payment?

Answer 20

Monthly

Investors get a monthly check which includes both interest and principal

(GNMA approves lenders who issue pass-through certificates created from a pool of mortgages & backed by full faith and credit of US gov)

Question 21

Limited tax bond

Answer 21

Municipalities issue these GO bonds when their ability to raise taxes is limited

Question 22

Double barreled bond

Answer 22

Muni bond

Funded by project revenue but is backed by the issuer’s full faith and credit (taxes)

Question 23

Industrial development revenue bonds are issued by a municipality but backed by ____

Answer 23

A private corporation

Issued by state or local gov on behalf of a private sector company

Question 24

Special tax bonds are backed by taxes other than ____

Answer 24

Other than real estate

Like alcohol or tobacco taxes

Question 25

Special assessment bond

Answer 25

Type of muni GO bond that is paid for with taxes only from people who will benefit from the project

Question 26

If the muni does not make enough revenue from a project funded by moral obligation bonds to pay back the bond holders, why would the muni not just decide it doesn’t want to pay back bond holders?

Answer 26

Because it would hurt the municipality’s credit rating

Although they could technically not pay back bond holders if not enough revenue from project

Question 27

Moral obligation bond

Answer 27

Revenue bond where if the project does not make enough money, muni promises it will find other ways to pay back bond holders.

Muni wouldn’t want to default on their moral obligation since it hurts credit rating

Question 28

As a general rule, debentures pay interest every ___ months

Answer 28

6 months

Question 29

Public and New Housing Authority Bonds

Answer 29

Provide financing for low and moderate income housing

Backed by full faith and credit of US gov

Question 30

Is a debenture backed by the issuers full faith and credit?

Answer 30

Yes

Backed by full faith and credit if issuer
Although still unsecured debt

Question 31

In a liquidation, are subordinated debentures paid before or after regular debentures and general creditors?

Answer 31

Paid after

Subordinated debentures paid after general creditors and regular debentures