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Series 7 > Debt Instruments > Flashcards

Debt Instruments Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Risk that an issuer may become unable to meet interest or principal payments

Also known as business or default risk

A

Credit Risk

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2
Q

Order from lowest to highest risk of bond issuers

  • Corporate
  • Government
  • Municipal
A
  1. Government
  2. Municipal
  3. Corporate
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3
Q

Identify the credit rating issuer

AAA

AA

A

A

S&P

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4
Q

Identify the credit rating issuer

Aaa

Aa

A

A

Moody’s

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5
Q

What is the threat of suffering a loss due to a chanige in interest rate? All fixed income securities are subject to this.

A

Interest Rate Risk

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6
Q

Risk that in a falling interest rate environment, bond proceeds must be reinvested at lower rates

A

Reinvestment Risk

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7
Q

Risk that a callable bond will be redeemed by the issuer before maturity, which is usually when interest rates have fallen.

A

Call Risk

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8
Q

All of the bonds are issued at once and all mature at once.

Example quote: 98, 101 1/2

A

Term Bonds

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9
Q

All bonds are issued at once and mature in increments over several years.

Example quotes: 6.10%

A

Serial Bonds

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10
Q

Rate which the issuing corporation has contracted to pay interest through the life of the bond

A

Stated Rate

Nominal Rate

Coupon Rate

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11
Q

(Annual Dollar Interest Paid) x 100%

____________________________________

(Current Market Price)

A

Current Yield

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12
Q

Discount Bond yields from lowest to highest

  • Current Yield
  • Nominal Yield
  • Yield to Maturity
  • Yield to Call
A
  1. Nominal
  2. Current Yield
  3. Yield to Maturity
  4. Yield to Call
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13
Q

Premium Bond Yields from lowest to highest

  • Yield to Maturity
  • Nominal Yield
  • Current Yield
  • Yield to Call
A
  1. YTC
  2. YTM
  3. Current Yield
  4. Nominal Yield
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14
Q

The measure of current net market yields on a mutual funds portfolio.

A

Standardized Yield (SEC Yield)

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15
Q

If the issuer of the bonds has transferred title to specific assets to the custody of a trustee, what kind of bonds are being sold?

A

Secured Bonds

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16
Q

What are some assets that back secured bonds?

A
  • Real estate mortgages
  • Equipment owned by issuer
  • Collateral Trust Certificates
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17
Q

Most common secured bond collateralized by lien or mortgage against real estate property

A

Mortgage Bond

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18
Q

Bond that allows the corporation to issue subsequent bonds secured by the same property at a later time

A

Open-End Bonds

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19
Q

Bonds that specify the maximum indebtedness the corporation can issue against the same lien, which also offers the greatest protection

A

Closed-End Bonds

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20
Q

List of covenants that serves as a contract between issuer and trustee that states whether bond issue is open or closed ended. Found in revenue bonds.

A

Bond Trust Indenture

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21
Q

Bonds issued by railroads and airlines that are secured by the railroad cars and airplanes

A

Equipment Trust Certificate

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22
Q

Bonds secured by the securities of a different issuer

A

Collateral Trust Certificate

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23
Q

Bonds issued by well established corporations that are backed by the full faith and credit of the issuer, which carry more risk and pay a higher coupon rate

A

Unsecured Bonds or Debentures

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24
Q

Bond issue that is guaranteed by the full faith and credit of an issuer, but is also cosigned by another entity

A

Guaranteed Bond

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25
Q

Bonds that are convertible into common stock of the issuer at the bondholder’s discretion

A

Convertible Bond

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26
Q

Bond that has initial nominal rate which increases to a prespecified higher rate

A

Step Up Bond

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27
Q

When a corporation cannot honor the terms of a bond issue, this is the product of the debt renegotiation or bankruptcy proceedings.

A

Income Bond

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28
Q

Highly liquid and very safe investments that are guaranteed by the full faith and credit of the US Government and issued in book entry form

A

Treasury Securities

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29
Q

Treasury security taxation for interest and capital gains

A

Interest subject to federal tax but not state or local taxes

Capital gains fully taxable

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30
Q

What are securities that must be redeemed by the treasury through banks and do not trade investor to investor?

Ex. Series EE, Series HH

A

Non-Marketable Securities

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31
Q

Treasury issue securities that can be traded for value on the secondary market

A

Marketable Securities

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32
Q

When securities are issued and exist only as electronic records in computers without physical certificates of ownership

A

Book-Entry Form

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33
Q

Government security that is an Original Issue Discount instrument (OID), has maximum 1 year maturity, is quoted on a discount yield basis, has no stated interest rate and does not pay semiannual interest

Example Quote:

Bid - 7.45

Ask - 7.30

A

Treasury Bill

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34
Q

What are the T-Bill maturities and how are they auctioned?

A
  • 4 weeks
  • 13 weeks (auctioned every week)
  • 26 weeks (every week)
  • 52 weeks (every month)
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35
Q

Government Security that has maximum 10 year maturity, has stated interest rate, quoted in points as a percentage of par, pays semi-annual interest and known as interest bearing security

Example Quote: 102.20

A

T-Notes

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36
Q

Government security that has maturity greater than 10 years, stated interest rate, semiannual interest and is known as an interest bearing security

Example Quote: 102.20

A

T-Bond

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37
Q

Treasury Issued Security whose principal is adjusted for inflation using consumer price index (CPI), has constant stated interest rate, and fluctuating semiannual interest payments

A

Treasury Inflation Protection Security (TIPS)

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38
Q

TIPS Maturities

A
  • 5 Years
  • 10 Years
  • 30 Years
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39
Q

What are zero coupon bonds issued directly from the US Treasury at a deep discount that gain value every year and the gain is considered interest income?

A

Separately Traded Registered Interest and Principal Securities (STRIPS)

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40
Q

Zero coupon bonds issued by broker/dealers at a deep discount but are not backed by the full faith and credit of the US government

It is an escrow receipt of escrowed US Treasury securities

A

Treasury Receipts

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41
Q

Derivative securities that derive their value from an underlying pool of GNMA, FNMA or FHLMC mortage-backed securities

A

Collateralized Mortgage Obligations (CMO)

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42
Q

Risk that if interest rates fall, CMO maturity will shorten due to homeowners refinancing and paying of their mortgages quicker, which returns principal to investors sooner rather than later.

A

Prepayment Risk

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43
Q

Risk that if interest rates rise, CMO maturity would lengthen due to homeowners not wanting to refinance and the investor would receive principal later than anticipated

A

Extension Risk

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44
Q

Government agency that provides money for student loans

A

Student Loan Mortgage Corporation (Sallie Mae)

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45
Q

Government agency that buys government mortgages, conventional mortgages and insured mortgages

Conventional and short term $10k Par Bond, Semiannual Interest

A

Federal National Mortgage Assocation (Fannie Mae)

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46
Q

Government Agency that buys FHA, VA and Farmer’s Home Administration insured mortgages

$25k modified mortage backed pass throughs, monthly interest

A

Government National Mortgage Association (GNMA)

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47
Q

Government Agency that buys conventional mortgages from financial institutions

$25k participation certificate pass through securities, semi-annual interest

A

Federal Home Loan Mortgage Asssocation (Freddie Mac)

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48
Q

Slice of a CMO that functions as its own bond with its own characteristics

A

Tranche

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49
Q

Safest tranche that has the more certain maturity date with less prepayment and extension risk

A

Planned Amortization Class (PAC)

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50
Q

Tranche with a higher yield that has more prepayment and extension risk

A

Targeted Amortization Class (TAC)

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51
Q

The riskiest and highest yielding CMO class that receives no principal or interest until all other tranches are paid

A

Z-Tranche

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52
Q

Type of collateralized security that is backed by short term loans on assets rather than real estate

Examples: Auto, Credit Loans

A

Asset Backed Security (ABS)

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53
Q

Notes, bonds, or CDs that are based on US dollars in foreign repositories, mainly in Europe, that can be issued by foreign corporations, domestic corporations or municipalities.

Cannot be issued by US Government

A

Eurodollar Securities

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54
Q

Bond that ranges in maturity from 5-10 years, pays interest once a year and is not subject to withholding taxes with a market centered in London

A

Eurodollar Bond

55
Q

What advantages do US corporations have in the Eurodollar Market?

A
  • No foreign exchange risk
  • Lower interest rates compared to domestic rates
  • Lower issuance expenses
56
Q

Short term, high quality debt issued by corporations or municipalities

A

Money Market Debt

57
Q

Unsecured corporate notes issued by blue chip companies with maturities ranging from 30-270 days. These are exempt securities.

Example Ratings: P-1, P-2, P-3, P-4

A

Commercial Paper

58
Q

Letters of credit, or import/export notes

A

Bankers Notes

59
Q

Collateralized paper issued for the purpose of buying and reselling securities typically overnight, from T-Bills to mortages to provide short term funds

A

Repurchase Agreements

60
Q

The process when a company wants to refinance and retire older bonds with higher interest rates. The issuer will sell new bonds with the lower interest rate and the proceeds will be used to retire the higher interest bond after the call protection has expired. In the interim, the low interest bond proceeds will be held in an escrow account that is invested in short-term treasury or agency bonds.

A

Advanced Refunding or Pre-Funding

61
Q

An advance refunded high interest bond that is guaranteed to be called on its called date, is quoted YTC, and is automatically AAA rated due to its escrow account.

A

Defeased Bond

62
Q

A covenant contained in the bond indenture that describes the process of advanced refunding, or pre-funding.

A

Covenant of Defeasance

63
Q

Bonds backed by full faith and credit of the issuer, which is the overall taxing authority. For states, its income and sales tax. Counties, ad valorem or property taxes.

A

General Obligation Bonds (GO Bond)

64
Q

Limit which establishes a ceiling for the total amount of general obligation debt that any community or government can issue.

A

Debt Limit

65
Q

A situation where multiple taxing authorities in a given geographic area have the ability to tax the same real estate that is considered a part of total GO debt.

Example: School district falls within a city. Both entities can tax residents.

A

Overlapping Debt

66
Q

What do GO bonds use to make debt service payments, which is interest and principal owed by the issuer?

A

Tax Collections

67
Q

GO debt backed by insecure, inadequate or insufficient revenue sources and tax collections. These cannot be advertised as revenue bonds due to its GO portion.

A

Double-Barreled Debt

68
Q

Bonds backed by user fees, revenues or special assessments that are collected from the facility or project. Projects include hospitals, toll roads, toll bridges, shipping ports, airports, and water and sewer systems. These are considered less safe than GO Bonds

A

Revenue Bonds

69
Q

Revenue bond where the state legislative authority can appropriate money to pay off the bond issue. It is not a legal obligation.

A

Moral Obligation Bond

70
Q

The analyst is reviewing a bond considering these factors. What bond is it?

  • Debt Statement
    • Overall municipality debt - self supporting debt
  • Overlapping Debt
  • Demographics
    • Income per capita
    • economic diversification
    • Ability to collect taxes
  • Community attitude towards debt and taxes
A

GO Bond

71
Q

The analyst is reviewing a bond considering these factors. What bond is it?

  • Feasability studies
  • Competing facilities
  • Debt service coverage ratio
A

Revenue Bond

72
Q

Federally taxable bonds issued to build sports stadiums or parking lots that are usually backed by corporations

A

Industrial Development Revenue Bonds (IDRs)

73
Q

Covenant in bond indenture that says issuer will set user rates so that they are sufficient to pay interest and repay principal in the bonds.

A

The Rate Covenant

74
Q

Covenant that addresses future issues of bonds. If additional bonds test determines that revenues from the facility are sufficient to support more new bonds, this covenant determines whether the bonds are open or close ended.

A

Open end, close end covenant

75
Q

Covenant that says issuer will maintain the facility so that it continues to generate revenues to repay bondholders

A

Maintenance Covenant

76
Q

Covenant that says if an extraordinary event were to occur, the issuer will use insurance proceeds to pay off existing bonds. The issuer then issues new bonds to finish the project.

A

The Catastrophe Covenant

77
Q

Escrow account that the issuer contributes to periodically, used specifically to retire bonds at maturity or call them earlier

A

Sinking Fund

78
Q

Covenant that says if escrow account for retiring bonds grows too rapidly, a mandatory call will be issued because the issuer cannot make money on the escrow account.

A

Sinking Fund Covenant

79
Q

Pledge that the issuer will pay operations and maintenance first, then debt service.

A

Net Revenue Pledge

80
Q

Pledge to pay debt service first, then operating and maintenance expenses.

A

Gross Revenue Pledge

81
Q

What are these ratings and who made them?

MIG-1, MIG-2, MIG-3

A

Moody’s Short Term Munis

82
Q

Short term municipal note issued in anticipation of a future tax collection. MIG-1 Rating, safest note.

A

Tax Anticipation Note (TAN)

83
Q

Short term municipal note issued in anticipation of facility revenues

A

Revenue Anticipation Note (RAN)

84
Q

Short term municipal note issued in anticipation of issuing a bond in the future. Riskiest note.

A

Bond Anticipation Note (BAN)

85
Q

Short term municipal note issued in anticipation of tax and revenue collection

A

Tax and Revenue Anticipated Note (TRAN)

86
Q

Short term municipal note used to finance short term needs of the municipality. The stated rate will fluctuate.

A

Variable Rate Notes (VRN)

87
Q

Long term bond with an interest rate that resets by Dutch Auction, issued by municipalities, corporations and government agencies. Not money market security, not necessarily liquid.

A

Auction Rate Securities (ARS)

88
Q

Taxable municipal bonds created by the American Recovery and Reinvestment Act of 2009, issued to fund public projects like highways, which offer either a federal subsidy to the issuer or a tax credit to the investor.

Issued from February 2009 to December 2010

A

Build America Bonds (BAB)

89
Q

When a banker/dealer acting as an adviser for a municipal underwriter discloses to an investor their involvement as an adviser to the issuer and underwriter of the new issue, what kind of underwriting is occuring?

A

Competitive Bid Underwriting

90
Q

When a banker/dealer acting as an adviser for a municipal underwriter terminates themselves as an adivser in writing, discloses total compensation as adviser and underwriter and states to the issuer that there is a potential conflict of interest in dual capacity, what kind of underwriting is being done?

A

Negotiated Underwriting

91
Q

Regarding municipal underwriting, what is found on the

  • Preliminary or Official Statement
  • Bond Confirmation, Invoice or Receipt
A

Disclosure of advisory relationship to muni issuer

92
Q

Obtained by the bond counsel (issuer’s attorney) for the bond issue that verifies the issuers legal authority to issue, whether the bond interest is federally tax exempt, and whether the bonds are exempt from SEC registration

A

Legal Opinion

93
Q

Bond Counsel sees no issues that could jeopardize the bond’s status

A

Non-Qualified Opinion (Clean Opinion)

94
Q

Bond counsel has identified potential issues that could affect bond status

A

Qualified Opinion

95
Q

Bond trades without legal opinion

A

Ex-Legal

96
Q

Bonds most commonly underwritten on a competitive basis

A

GO Bonds

97
Q

Bonds most commonly underwritten on a negotiated basis

A

Revenue Bonds

98
Q

An issuer places an invitation to bid on their bonds in the Daily Bond Buyer, where the official notice of sale is posted. What just happened?

A

The competitive bid underwriting process begins

99
Q

The most important publication in the primary municipal market which contains information important to primary market participants, which includes

  • 30 Day Visible Supply
  • Placement Ratio
  • Revdex
  • G.O. Index
  • 11 Bond Index
A

Daily Bond Buyer

100
Q

Information found in the Daily Bond Buyer that shows the total number of bonds coming into the market over the next 30 days

A

30 Day Visible Supply

101
Q

Information found in the Daily Bond Buyer that shows the number of bonds placed divided by number of bonds offered over the previous week

A

Placement Ratio

102
Q

Information found in the Daily Bond Buyer that shows the yield index of 25 revenue bonds with 30 year maturities. The bonds have various credit ratings and come from different industries such as stadiums and hospitals.

A

The Revdex

103
Q

Information found in the Daily Bond Buyer that shows the yield index of 20 GO bonds with 20 year maturities

A

G.O. Index

104
Q

Information found in the Daily Bond Buyer that shows the index of the average price of 40 recently issued bonds with an average maturity of 20 years

A

Bond Buyer Municipal Bond Index (40 Index)

105
Q

Information found in the Daily Bond Buyer that shows the index comprised of 11 GO bonds that are AA rated with 20 year maturities and is used as a benchmark for municipal bonds

A

11 Bond Index

106
Q

Wire service that provides up to date information on news affecting the municipal industry. The information is useful to underwriters in structuring and pricing new issues because it determines conditions such as competitive interest rates and buyer interest.

A

Munifacts

107
Q

How does an underwriter win a competitve bid?

A

Submit a bid resulting in the lowest net interest cost to the issuer

108
Q

What is happening when the total number of bonds allocated to purchasers exceeds the number of bonds in the offering and the underwriter has to follow an established procedure in allocating the bonds?

A

The issue is over-sold

109
Q

When a bond issue is over-sold, what is the priority order of bond allocation?

A
  1. Pre-Sale
  2. Syndicate or Group Net
  3. Designated net
  4. Member Related Orders
110
Q

Orders that involve accumulation accounts being established prior to offering UITs or bond mutual funds that are filled first when a bond issue is oversold. These are not allowed often due to the managing underwriter wanting to avoid favoritism.

A

Pre-Sale

111
Q

Order that benefits every member of the syndicate where the name of the buyer must be disclosed that is second in priority for an oversold bond issue

A

Syndicate or Group net Order

112
Q

Order in which the managing underwriter designated specific firms to complete the sale of the bonds and specified to those firms their takedown or compensation, and is third in priority for an oversold bond issue

A

Designated Net Order

113
Q

Order for the accumulation account of one syndicate member that has the lowest possible priority

A

Member-Related Order

114
Q

Municipal bond underwriting syndicate where each member is responsible for unsold shares according to their original percentage of participation

A

Eastern Syndicate (Undivided)

115
Q

Municipal bond underwriting syndicate where each broker/dealer is responsible for their percentage of the deal and nothing more

A

Western Syndicate (Divided)

116
Q

Compensation paid for underwriting that includes the takedown and managers fee.

A

Municipal Underwriting Spread

117
Q

Part of the municipal underwriting spread that includes a syndicate fee and a selling concession

A

Takedown

118
Q

Additional takedown in a corporate underwriting that is paid to each member of the syndicate according to their percentage of the underwriting.

A

Syndicate Fee

119
Q

Paid to syndicate members who sell bonds and also to selling group.

A

Selling Concession

120
Q

Quote in the municipal secondary market that is for information purposes only and is not binding. It is used to determine possible interest in one of its inventory positions, or availability and price on a abond it wants to buy.

A

Bid Wanted or Offer Wanted

121
Q

A non binding quote that is used by dealers to value bonds in inventory or if the dealer needs an estimated market price to consider a trade.

A

Working or Workable Indication

122
Q

Can a municipal dealer advertise a bond it doesn’t own? Why or why not?

A

Yes, it can as long as the dealer can get the bonds if asked and the dealer is not aware that the bonds are no longer available

123
Q

Quote that is good for an hour that reserves the right for the dealer to accelerate the deadline to 5 minutes.

A

Out firm, with five minute recall

124
Q

The MSRB system in which dealers report the sale and purchase of the municipal bond. This helps provide transparency into the municipal trading market to the public.

A

Real Time Transaction Reporting System (RTRS)

125
Q

System made to promote transparency in the marketplace by providing the most current information on municipal issuers to public customers as well as professionals, which includes copies of the official statements as well as last trades.

A

Electronic Municipal Market Access (EMMA)

126
Q

System that provides industry professionals and public investors with last trade information about instruments with short-term rates. This information is based on input from at least 3 professionals who access this system thorugh a password-protected website

A

Short-term Obligation Rate Transparency System (SHORT)

127
Q

Self Regulating Organization for the municipal bond industry which drafts rules regulating broker/dealers and has no staff of examiners to monitor or enforce rules, which is done by the SEC and FINRA. Broker/dealers who underwrite or trade munis must join this SRO.

A

Municipal Securities Rule Making Board (MSRB)

128
Q

If a credit analyst, training personnel, anyone handling order, money, or securities, making recommendations or another person has responsibility in a firm other than clerical and ministerial, they must pass these tests per MSRB rules.

A

Series 7 or Series 52

129
Q

Per MSRB rules, this person must apprentice for 90 days from employment, cannot talk to the public or be compensated for transactions in securities. They have 180 days to pass the Series 7 or 52, but only for municipal sales functions. Any other functions other than muni sales requires series 52.

A

Municipal Finance Professional (MFP’s)

130
Q

Full and fair disclosure of persons of a brokerage working or associated with the municipality, of a municipality working or associated with the brokerage, or an adviser serving as an underwriter in a negotiated underwriting, or a broker/dealer recommending municipal bonds which it owns in inventory to a discretionary account are examples of what?

A

Control Persons and Conflicts of Interest

131
Q

I want a bond that is bought at a discount and matures to its face amount, therefore locking in an investment return. I have a set period of time to invest my money and am concerned about reinvestment risk. What bond should I get?

A

Zero Coupon Bond

132
Q

I want the safest of all debt securities and I am very conservative. What would you recommend?

A

Government bonds, notes or bills

133
Q

I want tax relief by getting something that is tax exempt at the federal and possibly state level.

A

Municipal Bond

134
Q

I want a better rate of return than other conservative options. What debt securities would you recommend?

A

Corporate Bonds, sucka

Series 7 (10 decks)

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