Debt Securities Flashcards
Bonds
Bonds or loans. When you buy a bond you’re lending money to an organization whether it be a public corporation the federal government or a municipality. Bonds are classified as debt security and the investor becomes a creditor received interest payments for return on their capital
Bond basics
- Par value -
Loans that are made in increments of $1000. This is why we say that the par value of or a principal of a bond is $1000. - Coupon rate -
Interest rate of a bond is called the coupon rate and there’s a predetermined fix rate that is a percentage of the par value bond
Interest is paid semi annually which is twice per year
- Quoted in points -
Corporate bonds are quoted in points one point equal $10 - Maturity date -
The date the bond comes due for repayment to the investor.
The principal ($1000) is generally we repaid to the investor at the maturity date
Bond interest calculation
Coupon rate x par value = interest per year (\2 because semi is twice)
Bond terms
Describe how an issuer might structure it’s bond debt
- Series bonds -
Have different issue dates and usually have the same (term) maturity date. Frequently use for projects which are performed in various stages - Term Bond -
An entire issue of bonds that all have the same maturity date. - Sinking fund -
Represents money set aside to redeem the companies bonds or debentures
A. May be a mandatory debt retirement provision of a bond indenture. This feature adds to the safety of a bond issue but reduces the yield off the bond. It is frequently used for term bond issues where the entire issue matures at once but not on serial bond issues with staggered maturities
B. Sinking fund provisions can be used for bond issues as well as preferred stock issues
- Serial Bond -
An issue of bonds that have one issue date and staggered maturity date schedule at regular intervals until the issue is paid in full. Since serial bonds have varied maturities interest cost to the issuer it would progressively go down over the life of the bond as the short term maturity bonds were retired
* Balloon maturity -
A term that described a bond issued with a large amount of the issue that comes due at or near the final maturity date. - Funded debt -
Corporate debt that is due more than one year from the issue date and includes corporate bonds, notes, and bank loans. Funded debt does not include preferred stock, government bonds or municipal bonds.
Bond forms of issuance
- Registered -
These bonds are registered in the investors name and interest payments are sent directly to the investor by the corporations paying agent.
A. All bonds are currently issued as registered
B. Interest is paid directly to the investor.
C. Principal is sent directly to the owner at maturity
D. If an investor decides to sell a registered bond the investor would be required to sign the back of the registered certificate and deliver it to the broker dealer - Bearer -
Bearer bonds are not registered in the investors name and have interest coupons attach. To receive interest payments the investor must clip the coupons and present them to an authorized paying agent (usually a bank). Bonds are no longer issued in this form - Registered as to principal only - 
Registered in the investors name with interest coupons attached to receive interest payments the investor must clip the coupons and present them to an authorized paying agent (usually a bank). Bonds are no longer issued in this form - Most bonds are held in book entry and ownership is represented electronically
Bond Ratings
The quality of the barrows. Investment grade AAA highest AAA High grade A upper medium grade BBB Medium grade Speculative grade BB Lower medium grade B speculative CCC Outright speculation CC Outright speculation C reserved for income bonds no interest being paid DDD In default, with a rating indicating little chance for recovery DD relative salvage value 
Categories of bonds
- Corporate
- Government- federal (treasury)
- Municipal - State and local entities

Coupon rate vs yield
Coupon rate on a bond is the fixed rate of interest that is paid to investors. However the amount you actually get to put in your pocket can differ from the coupon rate. The actual rate of return which an investor receives is referred to as the bonds yield which takes into account the purchase price, interest payments, and redemption value off the bond
- The coupon is a fixed interest rate and is calculated as a percentage of the par value of the bond
- The yield is the rate of return that an investor receives based on the price paid for the bond.
Bond yields
A. Nominal yield = coupon or interest rate on face of the bond.
B. Current yield on bonds = Annual interest \ Market Price
Eg: An investor purchases a 9% bond at 90, the current yield is: 10%
$1000 x 0.09 = $90
$90$900 = 0.1 or 10%
C. Yield to maturity or basis -
Long term yield on a bond that is expressed as annual rate. It takes into account the purchase price, redemption value, coupon rate and time to maturity.
The primary difference between current yield and yield to maturity is it yield to maturity is that YTM considers time remaining until maturity (the time value of money) and current yield does not
* when the market price of a bond goes down, the YTM goes up
* when the market price of a bond goes up the way YTM goes down
Both preferred stocks and bonds are fixed income Securities. Therefore their market prices are sensitive to interest rate movements. Their market prices move in the opposite direction to interest rates. Inverse reaction means that as interest rate goes up the prices of a outstanding bonds will fall and that has interest rates go down the prices of outstanding bonds will rise
Yield to maturity
Basis points
- Changes in yield are measured in basis points. A basis point on a bond is equal to 1/100th of a point or 0.01% of the $1000 par value. A change of 1% is the yield of a bond is equal to 100 basis points
- Bond trading at discount will always have a basis YTM which is higher than the coupon rate
- Bond trading at a premium will always have basis YTM which is lower than the coupon rate.
- Bonds trading at par will always have a basis which is the same as the coupon rate
The longer the maturity of a bond, the more its price will decline when the interest rates go up.
- Short term bonds react the quickest interest rates changes
- Long term bonds react the greatest to interest rate changes
Long term bonds carry more risk than short term bonds. Short term bonds are considered to be safer and more stable when ranking the safety of investments

8. The longer the maturity of a bond the more its price will decline when interest rates go up.

Bonds : Duration
Duration is a measurement of the sensitivity of a bond market price due to changes in interest rates.
Eg. A bond with the duration of 5 will have a price movement of 5% for every 1% movement in the interest rate
In bond trading M is the Roman numeral for 1000 and is used to signify the dollar value of a quantity of bonds. So 5M bonds would signify $5000 worth of bonds.
Remember that it does NOT stand for 5000 bonds each worth $1000
Maturity of a bond
Short term bonds - quickest reaction. React the quickest to interest rate changes.
Safer than long term.
Long terms - Greatest reaction. The greatest to interest rate changes.
More risk
How are bonds trade?
- A discount - 
The bond market price is less than par value $1000
*. Par
The bond market price is the actual par value $1000
- A Premium - 
The bond market price is more than the par value Greater than $1000 
Corporate bonds
An instrument of debt issued by a corporation. Bond owners are creditors of the company that issued the bonds. Therefore bond holders are not equity owners off the corporation.
- 
Corporate bonds key facts
- Pay interest that is stated as a percentage of par value. Interest is paid semi annually and is fully taxable to the investor at the federal state and local level.
- Most corporate bonds are traded in the over-the-counter market as a dealer/principal transaction.
- Are quoted in points and eights of points as a percentage of par (eg. 102 1/8). In other words the quotation represents the percentage of par value ($1000) at which the bond is trading.
To calculate the dollar value of a bond use method:
Quoted Price x $10 = Dollar value
Eg: quote 96 (96x$10=$960) - Leverage Buy-Out -
Is a takeover of a company using borrowed funds. Generally, the assets of the target company are used as security for the loans. - A Spin-Off -
A corporate divesture that results in the subsidiary of a company becoming an independent company operating on its own - A Holding Company -
A corporation which owns enough of the voting shares of another corporation that it can influence that company‘s policies, management, and Board of Directors. - The Trust Indenture Act of 1939 -
A federal act that requires that all corporate bonds and debentures be issued under an indentured or a deed of trust. The bond indenture is a document with specifies the rights and duties of the issuer, Underwriter, and investor. Under the act, the issue is required to appoint a trustee who will represent and protect the bondholders add their interest in the event of a conflict of interest or default.
(Only applies to corporate, not federal, municipal, private or UIT)
Types of corporate bonds
A. Secured Bonds-
There are a number of different types of corporate bonds these first five types of bonds are more conservative investments and that they are secured by a guarantee or collateral of some sort
B. Debentures and Subordinated Debentures Are not secured by collateral or other types of assets. These bonds can still be safe, but carrry less safety than secure due to the lack of guarantee or a collateral.
C. Income, junk, and fallen angel bonds are considered risky investments in that they represent the lack of a solid credit record or the financial distress of the issuer. Therefore, these bonds will generally offer a higher coupon rates.
D. And finally, Zero coupon bonds are simply a different type of bond issue
Secured bonds
- Mortgage bond:
Is an instrument of debt secured by a mortgage on the real property owned by the issuing corporation . Mortgage bonds are the largest type of secured securities issued by corporations. The three main types of mortgage bonds are;
A. Closed-ended Mortgage Bonds: A mortgage bond in which the property used to secure the loan cannot be used as collateral to secure other future loans, unless the subsequent loans are lesser in claim
B. Open-end Mortgage Bond:
Mortgage bond in which the property can be used to secure a subsequent loans and all debts hold equal claims against the assets. Since all debts hold equal claim this creates more risk and therefore generally a higher yield.
C. General Mortgage Bond: mortgage bond that pledges all mortgageable properties of a corporation as collateral but does not name any specific lots. 
- Equipment Trust Certificate:
An instrument of debt that is generally issued by transportation companies to purchase new equipment. These bonds are secured by the new equipment. A trustee holds the title to the equipment until the bonds are completely paid at maturity. In the event of default on the bonds, bond orders have first rights to the titles of the equipment. These bonds are usually not callable are normally issued in serial form and rarely ever a default - Collateral Trust Certificate:
An instrument of debt issued by a company that uses Securities of other corporations that the issuer owns as collateral. The securities use as collateral are placed on a deposit with a trustee. Collateral trust certificates are generally issued by parent corporations that use the securities of a wholly owned subsidiary as collateral. - Guaranteed Bond:
Bonds guaranteed by a company other than the company that issued them (A parent company might guarantee the debt of a subsidiary company) - Parity Bonds:
Bonds which are issue that have equal claim or rights as other bonds which were previously issued
Debentures and subordinated debentures
- Debentures:
An instrument of debt backed by the good faith and credit of the issuing corporation only. They are unsecured debts in that they have no collateral. - Subordinated debenture:
Is a debenture bond which holds a lesser or junior claim than other debenture bonds and that would be paid only after higher level debenture claims had been satisfied
Income, junk and fallen angel bonds
- Junk bonds/high-yield bonds:
Bonds issued by companies without a long track record of sales and earnings, are companies that have questionable credit strength;
These are 1. BB or lower, have not been rated at all by bond rate and services. - Also called high yield bonds is yours and holders prefer this term to junk-bond. 3. Usually are more volatile than investment grade bonds. 4. Usually have higher yield than investment grade bonds. 5. Sometimes used to finance corporate takeover‘s.
B. Fallen angels:
Bonds that were issued as investment grade buns but have been downgraded to a junk bond rating.
C. Low quality bonds are generally have higher yields and lower market prices than high-quality bonds. High quality bonds generally have lower yields and higher market prices than low quality bonds.
- Income or adjustment bonds: 
Are often issued by companies in financial difficulty trying to avoid bankruptcy. They promised to pay interest only if they have sufficient earnings and the Board of Directors declare that interest will be paid. 
A. Principal is still due at maturity
B. These bonds normally trade flat meeting without accrued interest
C. Cloud adjustment bonds when use in a corporate re-organization
D. Considered to be risky investment
Zero coupon bonds
Sold at deep discounts and pay no interest while the bonds are outstanding.
A. Do not pay semi annual interest and therefore do not have accrued interest.
B. Issued as a discount. The discount is representative of the amount of interest that the bond would pay, but no interest is paid over the life of the bond.
C. Increase in value by means of accretion. Accretion represents the amount of imputed interest which has accumulated on a bond purchase at a discount.
D. At maturity they pay the investor one lump sum, which includes investors initial investment plus imputed interest.
E. Produced phantom income as bond holders are taxed annually based on the increased value of the security even though they have received no actual income.
F. Purchased by investors seeking accumulation of capital. Investors will often use zero-coupon bonds as a means of accumulation of capital for an upcoming project or goal.
G. Are the most volatile of all fixed income securities. Zero coupon Bonds Market Price have a high volatility because they are you issued at a discount they do not pay interest semi annually and they accrete value from imputed interest which isn’t paid until maturity
H. A quote for a zero coupon bond is generally identified with “zr” in the quote.
Calculate zero coupon bonds
When calculating The amount of accretion on a zero-coupon bond one would use the:
- Purchase date
- Purchase price
- The date for a new bond issue from which to interest accrues
- Maturity date
But would not use the current market value off the zero coupon bond

Features of corporate bonds
- Bonds can be called (redeem early) at the option of the issue or at a pre-established premium price, after a specified date.
- Call features are adventurous to issuers NOT to investors.
A. A callable price would be an attractive feature for an issuer
B. A high call premium or price would not be attractive for an issuer. - A call price can place a ceiling on the appreciation possibilities of a bond since a company might call in a high coupon bond if interest rates decline.
- A call protection is the fix time. During which bonds may not be called by the issuer.
A. Bondholders want interest rates to decline during the call protection period
B. Bondholders want Bonds prices to rise during the call protection.
- The higher the coupon rate on the bond the greater the chance that the issuer will call the bond because the issuer can retire the higher interest bond with a new bond at a lower rate.
- Bonds and preferred stock may be callable but common stock is never callable
- When a company calls it’s bond the;
A. Find all the receiver premium called call premium plus the accrued interest. The premium is the amount paid on top of the par value of the bond as additional compensation for the early redemption.
B. Credit worthiness of the company improves (less debt)
C. Debt to net worth ratio improves (decreases)
- Prior to calling Bonds The issuer must give the investor “notice of called” stating the date the bonds will be redeemed. During this time investors may:
A. Convert the bonds (if the bonds are convertible)
B. Sell the bonds or
C. Wait for the redemption date.
* investors would choose the option that puts the most money into their pocket”**
- Interest payment stop after a bond is called.
- Callable bonds usually trade at a lower price because the call features are undesirable to investors.
- When an issuer decides to call bonds, it can make a “partial call” where only part of the issue is redeemed. When this occurs, the bonds which are called are selected on a “random basis” from the entire issue.
Convertible bonds
- Convert to shares of common stock at the option of the holder.
- Bonds are converted at a specified rate, call the conversion price. The conversion price tells you how many shares of common stock the investor would receive upon conversion.
- The coupon rate of a convertible bond is normally lower than on non-convertible bonds of the same quality. This is due to the convertibility of the bond into common stock if desired by the investor. A conversion feature allows bond holders to participate in the growth of the corresponding equity security.
- Convertible Securities typically will have a more volatile market value than those of non-convertible securities because the convertibles value is tied to the market value of the common shares and common stock values typically fluctuate more than preferred stock values.
Convertible Bonds calculation
Par value\conversion Px =
Common shares received
Eg. A convertible bond has a conversion price of $50. How many shares of common stocks is produced if the bond is converted?
$1000$50= 20 shares
Refund in bonds
The sale of a new issue of bonds, the proceeds of which are used to retire an outstanding issue. Refund is general done when there is a sharp decline in interest rates.
A Collateralized mortgage obligation (CMO)
Is a bond that is secured by a pool of mortgage loans. CMO issuer mortgage Backed Securities.
- Basic facts about CMO‘s:
A. Historically, CMO‘s have been safe investments.
B. CMOs provided secure income to investors on a monthly basis.
C. CMOs were safe investment for investors in all tax bracket but were often used by investors in a low tax brackets to supplement monthly income.
- In the structuring of a CMO, the issuer estimates the anticipated life of the mortgages contained in the pool of mortgages and distribute cash flow from the mortgage payments to a series of different classes of short term, median term, and long-term maturities.
A. These vary different classes are called tranches.
B. Each tranche will have an anticipated life expectancy such as 2 years or 4 years and have different degrees of risk (long-term tranches have greater risk.)
C. Interest on CMOS is paid at a fixed coupon rate over the life of the CMO.
D. Principle of the CMO is paid in varying amounts over the life of the CMO depending on the various tranches and varying maturity factors.
- CMOs are considered derivative Securities because the cash flow of the CMO is dependent on the performance of a pool of mortgages.
Issuers of CMO’s
CMR pools are issued and collateralized (secured with collateral) with mortgage loans from:
- Ginnie Mae, Fannie Mae, or Freddie Mac.
- FHA mortgage loans
- Conventional/private mortgage issuers
Planned amortization class (PAC)
PACs are CMOS which most resemble bonds because they have a sinking fund structure, which means investors will receive payments over predetermined period with stable cash flow. PACs have companion bonds or a non-PAC bonds, which bear the risk. PACs have less than average exposure to call risk
CMO Tranche information
- CMOs trenches generally pay investors monthly. Interest payments are subject to federal, state, and local income tax. Interest is allocated pro-rata (divided according to an exact formula) to each trench.
- Principal payments and pre-payments from the loans in the CMO pool pay off one trench at a time in order of maturity (tranche 1,2,3 etc)
- A Z-Bond is the final tranche of a CMO, which is also called an accrual bond or accretion bond. Holders of Z-bond receive no cash until earlier trenches are paid in full.
- CMO tranches that pay a variable rate of interest are usually measured to the London interbank offered rates (LIBOR)
- CMO‘s trade OTC with markups and markdowns.
Risk considerations with CMOS
Considerations made by an investor when considering a CMO include.
1. Credit risk - historically, CMO‘s have had little or no credit risk because most CMO‘s are guaranteed by US government sponsored enterprises or agencies (Ginnie May, Fannie May, Freddie Mac) and have carried a a a readings. However, they are riskier than US treasury securities.
- Interest rate and market risk - if rates decline:
CMO prices will increase, mortgages will be refinanced and a pre-payment occur. If rates rise, mortgages typically are held through maturity and lower rate CMO’s maybe less desirable than newer, higher-rate CMO’s.
Risks associated with maturity
A. Implied called risk (pre-payment risk) :
This is the risk that principle will be returned sooner than originally anticipated.
1. This may occur due to sharp interest rate declines and increases in refinancing activities
2. It also may occur if mortgage holders pay off their loans ahead of schedule.
B. Extension risk:
This is the risk that the maturity of the CMO‘s may be extended or end up longer than expected.
1. Typically, some pre-payment of mortgages is anticipated estimate in the various tranches of a CMO. If there is no pre-payment of any of the underlying mortgages, the maturity of the CMO may be extended beyond the anticipated time frame.
CMO advertising requirements (FINRA rule 2216)
- Advertisement must not contain comparisons between CMOS and any other investments, including CDs. (CMO‘s are not as safe as CDs)
- Advertisements must prominently displayed a final maturity date of the security.
- Advertisement must include a description of the initial issue tranche
Agency CMO’s are
- Securities guaranteed and/or issued by Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie May (GNMA)
- The guarantees associated with these “agencies”enhance the credit quality of CMO’s.
- Ginnie May pass-through securities, in particular, are comprised of FHA and VA mortgages that are guaranteed against default
Private CMO’s are
- Securities issued by private institutions such as banks, investment banks, and homebuilders.
- Some of the private CMO‘s will include agency mortgages in their portfolios, they are also made up of other types of mortgage loans, pools of mortgage loans, and letters of credit.
- Private CMOs are backed only by the issuer of the product and are not backed by any government guarantee. The CMOS can also be referred to as private-label CMO’s
- Independent credit agencies provide ratings on these products based on their collateral and the issuer
Collateralized debt obligations (CDO)
Is a structured debt security backed by a pool of assets including mortgages, auto loans, corporate debt and credit card debt. These debts are packaged and sold to investors. The CDO is divided into different trenches like a CMO generally based on risk.
Treasury bills characteristics
- Direct short-term debt obligations of the federal government.
- Are highly marketable and low risk they are referred to as a risk-free investment
- Sold at a discount at competitive bid auctions and redeemed at par on maturity.
- Marketable, but not redeemable until maturity.
- Normally available in 1, 2, 3, 6, and 12 months maturities. They are never issued with a maturity of more than one year.
- Offer the investor an extremely liquid investment of the highest quality.
- A long term policy of investing in treasury bills would result in stable principal and a fluctuating rate of return. Investors needing any cash in the next 12 months should buy T-bills.
- The return earned an all US government securities is exempt from state and local income taxes but it’s subject to federal income taxes.
- Issued with a minimum denomination of $100
- Do not carry a fixed rate of interest
-  not callable prior to maturity
- T bill discounts or tax as interest income to investors and not as capital gain. T bills are quoted on you basis (the discount from par)
Characteristics of treasury notes, bonds, TIP’s:
- Issued in minimum denominations of $100 (formally $1000)
- Fixed rate of interest which is paid semi annually which is exempt from state and local income tax, but subject to federal income tax.
- Regular way settlement is T+1 in the secondary market
- Regular way settlement is T +3 in the primary auction market.
** Treasury notes :
Have maturities of 2 to 10 years and are not issued as callable.
** treasury bonds:
Have maturities of 10 to 30 years and maybe issued as callable..
Treasure point
A point on a treasury note or a treasury bond is equal to $10 and fractions of points are quotes in 32nds Therefore, a treasury bond quoted @ 97.16 would have a dollar value of:
97 x $10 = $970
16/32 x $10 = $5
————-
$975.00Treasury inflation protected securities TIP’s, characteristics
- Treasury notes and bonds whose interest and redemption payments are “indexed” to the current inflation rate based on the consumer price index (CPI)
- Interest is paid semi annually at a fixed rate, but the fixed rate is applied to the inflation adjusted principal value of the bond not par off $1000.
- Interest is subject to federal tax but exempt from state and local tax.
- Principle is adjusted to CPI
semi annually - The final payment on a TIP cannot be less than what the investor originally paid.
- Appreciation and the principal value of the TIP must be reported annually and is subject to federal income tax at the time reported (phantom income)
- TIP‘s are auctioned in July, October, and January.
- Because of the inflation index in feature, TIP‘s preserve an investors capital best among all treasury securities.
STRIPS - Separate trading of registered interest and principal Securities, Treasury receipts (TR’s), zero coupon treasury bonds, or stripped treasuries
Several brokerage firms offer investors the ability to purchase certificates which represent a portion of a trust with the treasury bonds as the underline security the trust buys a large quantity of treasury bonds, strips the coupons and then offer certificates or receipts with a varied maturities to investors.
- Treasury receipts are stripped coupon treasury bonds.
- They trade at a deep discount which are accreted and taxed annually and are very volatile
- All of the interest is paid at maturity
- Purchasers are able to lock in a rate of return for a predetermined period.
- Interest and principal payments on the stripped bonds are guaranteed by the US treasury and therefore are of the highest quality.
- Interest on treasury receipts is taxable annually an accrual even though the investor receives only one payment at maturity
- Individuals normally portraits treasury receipts for retirement plans such as IRAs and Keogh’s that have no current tax liability
Settlement on US government securities
Regular way settlement for US government securities in the secondary market is the business day after trade date. Payment is normally required in federal funds.
Series EE savings bonds
Our non-marketable federal government debt. They are:
- Issued at face value and earn interest
- Interest is received and tax when the bonds are redeemed.
- Offered in denominations of $25-$10,000 (max per calendar year limit)
- Electronically registered in the investors name.
- Non-marketable, meaning they cannot be sold to another investor but must be redeemed back to the government
- Not subject to market fluctuations.
- Redeemable prior to maturity (after one year)
- Not eligible to be used as collateral for a loan because they are not marketable.
Government agency and government sponsored issues
- are considered low risk investments
- Quoted in 32nds as a percentage of par value
- are exempt from the registration requirements of the securities act of 1933
- Generally have a higher yield then direct obligations of the US government
Municipal bonds
bonds issued by state and local government entities such as cities, counties, school districts, authorities, and the state. The tax benefit of investing in municipal bonds include
- interest is exempt from federal income tax
- Interest may also be exempt from state and local income taxes
Types of municipal bonds
GENERAL OBLIGATION BOND
Bonds that are general obligation of the issuing municipality. Payment of principal and interest is not limited to the revenues derived from any one specific project. Another name for a general obligation bond is full faith and credit bonds
Principal and interest payments on these bonds are secured by/from taxes collected by the municipality. Most states require voter approval to issue general obligation bonds.
REVENUE BONDS
Bonds for which the payment of bond interest and principal depends on the revenues generated from a particular facility, such as a toll road or bridge, rather than from the taxing powers of a city or town
Revenue bonds are popular because:
A. They do not require a vote of the citizens.
B. They do not count towards any constitutional our statutory limit on the amount of debt a municipality may incur
C. They are not payable from taxes and will not contribute toward any possible future increases of taxes.
D. Industrial development Bonds also called industrial revenue bonds. The municipality approve the sale of bonds on behalf of a corporation to construct our purchase facilities that are then purchased by or leased to a private user.
Taxable equivalent yields
- Municipal yield to corporate yield
* If I investor is in the 28% federal tax bracket what interest rate would the investor have to receive on corporate bond to have the same tax income on a miserable body than 6%.
Municipal \ (100% - investor tax rate) = corporate Equivalent Yield
.06 \ .72 = 8.33%
- Corporate yield to municipal yield
If an investor is in the 28% tax bracket what interest rate with the investor have to receive on a municipal bond to have the same income as a corporate bond yield in 8.33%
Corporate yield X (100% - investor’s Tax Rate) = municipal equivalent yield
.0833 X .72 = 6% - The alternative minimum tax AMT was designed to make sure that even the wealthiest individuals, trust, Estates and corporations pay some income tax. AMT is applied to tax preference items. 
The official statement (OS)
I disclosure document. It can be provided by the S you are not required and it’s like a prospectus. It contains the most detailed financial information on a new issue of municipal bonds. If an official statement is provided by that is you are, it must be provided to all customers who purchased a new issue and, upon request be provided to other broker dealers. In the event that an issue or does not provide an official statement broker dealers would not be required to provide it to purchasers off the bond or other broker dealers
Negotiated deal
This is when a municipality hires a managing underwriter to handle the distribution of a new SU of revenue bonds. An underwriting agreement (agreement among underwriters) describes a terms and interest cost for the offering which I negotiated directly between the municipality and the managing underwriter
Competitive bidding
This is where the municipality request sealed beds from underwriters are underwriting syndicates. It will award the bonds to the group that offer is the municipality the lowest net interest cost. The net interest class and I see is a total amount of interest that the municipality will pay on the bond issue. In determining the net interest cost, any premium over par that is received when the bun a sword is subtracted from the interest cost on the issue. Most general obligation buns are awarded on the basis of competitive bidding.
Municipal notes
Municipal that also includes notes which are short term debt instruments. They are used for a temporary/interim financing.
1. Text anticipation notes (TAN): A TAN is used to raise money in which will be paid off with tax receipts in the near future.
- Revenue anticipation notes (RAN) - A RAN raises money is which will be paid off when certain revenues are realized or received.
- Tax and revenue anticipation notes (TRAN) - A TRAN is a combination of a text and we have a new note.
 4. Bond anticipation notes (BAN) - is used to raise money which will be paid off from the sales of bonds in the near future. In the meantime, it will issue notes to carry through until the long term bond revenues are received. - Grand anticipated notes (GAN) - are grandes received by municipalities from the federal government generally from the federal transit authority program for the purchase of buses, trains, fairies, vans, and support equipment. These grants are dependent on congressional appropriation
- Other types of short term obligations of a municipality include:
a. Construction loan and notes (CLN) - No it’s typically easier to find housing projects.
b. Demand notes - use for a short term financing that are callable on demand
c. Tax exempt commercial paper. This paper is short term maximum of 270 days issued to:
1. Where is work in capital
2. Cover extraordinary expenses or
3. Cover construction or maintenance costs
Commercial paper is not issued to refund outstanding bonds
Build a America Bonds (BABs)
Or a taxable municipal bonds issued for infrastructure rebuilding. (schools, hospitals roads etc)
- BABs cannot be used to refinance outstanding debt
- Interest payments are fully taxable to investors
- Interest paid by the municipality is subsidize either by the federal government paying back the municipality 35% of the interest paid out our bond orders may take a federal tax credit equal to 35% of the interest expense
- Expands the market for a municipal bonds to pension plans and foreign investors
Municipal fund securities
Include local government investment pools (LGIPs) Able Programs, and 529 plans. The securities can either be sold her directly to investors by the SURR through an investment advisor.
MSRB political contribution limits MSRB Rule G-37)
The municipal securities real making board governance political contributions made by municipal finance professional MFP, municipal dealers, or political action committees controlled by the broker dealer or MFP, to officials off on issuer. Unofficial of the SU were covers any person including any election committee for such person who was, at the time of the contribution an incumbent, candidate, or successful candidate. If the candidate to whom a contribution was made loses the election that person would still be considered an official of the issuer
- Contributions cannot exceed $250 per election and the municipal finance professional must be able to vote in the election
- If a violation of rules occurs for example contribution greater than $250 the municipal dealer with whom the MFP is associated is prohibited from engaging in municipal securities business for two years with the issue or to which the improper contribution was made
- Required disclosures each municipal dealer must file farm G Dash 37 with the MSRB quarterly with information about contributions to officials of is yours and political parties and bond ballot campaigns in excess of permitted contributions
Municipal variable rates Securities
Our debt securities which have floating or fluctuating interest rates the floating rates are generally reset at specified intervals but normally have a final maturity which is more than 10 years from the date of issuance these securities include
1. Variable rate demand obligations are notes VRDO or floaters
- Floating rate notes F RNs
- Auction rate Securities
Both available read demand obligations or notes and floating right now it’s can be offered with a put feature which allows the investor to put or sell the security back to the issue or, generally at for face value plus accrued interest. Auction rate securities are not offered with a put feature
Exchange risk
Is associated with foreign and sovereign debt (bond) issues not US or domestic debt (bond) issues
Money market
Instruments are high-quality, short term mature in (12 months or less) debt instruments and include
- Treasury bills
The most liquid of all money market instruments - Negotiable certificates of deposits CDs
A. Issued and guaranteed by banks generally commercial banks
B. 100,000 minimum deposits
C. Generally have fixed maturities of one year or less
D. Usually trade plus interest and are in registered form
E. Penalties may incurred if cashed in prior to maturity
F you are a dollar certificates of deposits are short term instruments issued by banks outside the US. Interest and principal is paid in US dollars
**There are CD that much you’re in more than 12 months. These long-term CDs may have maturities of 3, 5 , or even 10 years.
- Commercial paper
Is an unsecured promissory note issued as a discount by corporations, generally used to finance daily operations not international trade. Commercial paper is re-paid from accounts receivable it is issued for a specific amount and has a set maturity date with a maximum maturity of 270 days. It is not guaranteed by the FDIC. - Bankers acceptances
Used to finance foreign trade and are similar to a letter of credit. These are the least liquid of all money market instruments
