Debt Securities Flashcards
municipal bond taxes
interest is tax exempt at a federal level and may be tax exempt at a state and local level if the purchaser is a resident of the issuing state.
official notice of sale
when municipal issuers raise money through a competitive underwriting
what is published in a notice of sale
the details of the offering including amount of capital to be raised and maturity dates for the issue
bankers’ acceptances (BA)
Debt securities used to finance foreign trade. This is a money market instrument
Nominal Yield
the fixed coupon rate, expressed as a percentage of the par. It is stated as the annual rate, but interest is paid semi-annually.
callable bond
bonds that are subject to early retirement at the issuer’s discretion, typically if the interest rates fall in the market. These bonds have higher rates than non callable bonds
premium bond
bonds trading in the secondary market at a price higher than par. when rates in the market decrease, bond prices increase
interest-rate risk
the risk that an increase in interest rate will result in lower prices
Risk associated with fixed income securities like bonds and preferred stock
interest- rate risk
T-Strips
U.S. Treasury zero-coupon instrument backed by the U.S. government.
These are issued at a discount and mature at face value up to 30 years
T - Strips
Asset- Backed Securities (ABS)
A pooled fixed income investment, which contains auto loans, credit card debt and home equities
Subject to both extension risk and prepayment risk
Asset-Backed Securities
These bonds are issued by a corporation under reorganization coming out of bankruptcy
Income bonds
Income Bonds
no legal obligation to pay interest payments, these bonds carry a high default risk
Also called an adjustment bond
Income bond
Revenue Bonds
they are considered private activity
what are revenue bonds backed by?
lease payments pledged by a corporation
T-notes
They are issued at par and pay semi-annual interest that is federally taxable
Government bond that matures in 2-10 years
T-note
Pass-through certificate that has interest and principal guaranteed by the U.S. government
Ginnie Mae (GNMA)
Ginnie Mae (GNMA)
make monthly payments to investors of principal and interest.
Convertible Bond
bonds that can convert to shares of common stock based on the conversion ratio
These bonds have a lower coupon due to future capital appreciation, if converted to common stock
convertible bonds
preliminary official statement
Prepared by or for an issuer that describes the same details as found in the final official statement, except it doesn’t include price and interest rates.
TIPS (stands for)
Treasury Inflation Protection Security
TIPS
U.S. government debt where the principal amount is adjusted every 6 months based on the changes in CPI.
CPI
Customer Price Index
These bonds have no inflation risk
TIPS
Short government debt with maturities of 1 year or less
T-Bills
T- Bills
Priced at a discount and mature at par with no periodic interest payments
Tax-free equivalent yield (equation)
corporate yield x (100%- tax bracket)
call protection
the time between the issue date and the first potential call.
par value
face value for a bond is 1000
Issuers pay investors interest semi annually and the principal at maturity
Bond
Guarantee Bonds
unsecured bond backed by the promise of the issuer to pay, but also a parent company. If the issuer defaults, the parent company makes the payments.
Discount bond
bonds trading in the secondary market at a price lower than par.
Inverse relationship (bonds )
when rates in the market increase, bond prices decrease.
treasury receipt
backed by the interest and principal of treasury securities owned by the BD. Not a direct obligation of the U.S. government
Zero- coupon security, similar to a Treasury STRIP, that is created by BDs
Treasury Receipt
Debentures
unsecured corporate debt, backed by the full faith, credit and promise to pay.
these are long-term unsecured debt, as opposed to commercial paper, which is short term unsecured debt
debentures
money market securites
short-term debt instruments with 1 year or less to maturity, highly liquid with safety of principal
T-bills, commercial paper, BAs, CDs and government debt with less than 1 year until maturity are all
Money market securities
call risk
loss of income due to early retirement of a callable issue of bonds.
when will issuers call in bonds?
when interest rates fall. The most likely to be called are high interest rate, with low call premium
Trust indenture
the legal agreement that outlines the terms of the loan between the issuers and bondholders.
general obligation municipal bonds (GO)
these bonds are backed by the full faith and credit of the issuer and are funded by state or local taxes, including ad valorem, sales, and real estate taxes
collateralized mortgage obligations (CMO)
a pool of mortgages that divide interest and principal into separate tranches
These obligations are subject to prepayment risk when interest rates decline in the market, and extension risk when rates in the market rise
CMOs ( collateralized mortgage obligations)
municipal bonds (revenue bonds)
these bonds are backed by users’ fees, such as toll roads, parking structures, airports, or convention centers. This is a self supporting debt.
tax equivalent yield (equation)
municipal yield / (100% - tax bracket)
