Debt Securities

Question 1

municipal bond taxes

Answer 1

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.

Question 2

official notice of sale

Answer 2

when municipal issuers raise money through a competitive underwriting

Question 3

what is published in a notice of sale

Answer 3

the details of the offering including amount of capital to be raised and maturity dates for the issue

Question 4

bankers’ acceptances (BA)

Answer 4

Debt securities used to finance foreign trade. This is a money market instrument

Question 5

Nominal Yield

Answer 5

the fixed coupon rate, expressed as a percentage of the par. It is stated as the annual rate, but interest is paid semi-annually.

Question 6

callable bond

Answer 6

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

Question 7

premium bond

Answer 7

bonds trading in the secondary market at a price higher than par. when rates in the market decrease, bond prices increase

Question 8

interest-rate risk

Answer 8

the risk that an increase in interest rate will result in lower prices

Question 9

Risk associated with fixed income securities like bonds and preferred stock

Answer 9

interest- rate risk

Question 10

T-Strips

Answer 10

U.S. Treasury zero-coupon instrument backed by the U.S. government.

Question 11

These are issued at a discount and mature at face value up to 30 years

Answer 11

T - Strips

Question 12

Asset- Backed Securities (ABS)

Answer 12

A pooled fixed income investment, which contains auto loans, credit card debt and home equities

Question 13

Subject to both extension risk and prepayment risk

Answer 13

Asset-Backed Securities

Question 14

These bonds are issued by a corporation under reorganization coming out of bankruptcy

Answer 14

Income bonds

Question 15

Income Bonds

Answer 15

no legal obligation to pay interest payments, these bonds carry a high default risk

Question 16

Also called an adjustment bond

Answer 16

Income bond

Question 17

Revenue Bonds

Answer 17

they are considered private activity

Question 18

what are revenue bonds backed by?

Answer 18

lease payments pledged by a corporation

Question 19

T-notes

Answer 19

They are issued at par and pay semi-annual interest that is federally taxable

Question 20

Government bond that matures in 2-10 years

Answer 20

T-note

Question 21

Pass-through certificate that has interest and principal guaranteed by the U.S. government

Answer 21

Ginnie Mae (GNMA)

Question 22

Ginnie Mae (GNMA)

Answer 22

make monthly payments to investors of principal and interest.

Question 23

Convertible Bond

Answer 23

bonds that can convert to shares of common stock based on the conversion ratio

Question 24

These bonds have a lower coupon due to future capital appreciation, if converted to common stock

Answer 24

convertible bonds

Question 25

preliminary official statement

Answer 25

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.

Question 26

TIPS (stands for)

Answer 26

Treasury Inflation Protection Security

Question 27

TIPS

Answer 27

U.S. government debt where the principal amount is adjusted every 6 months based on the changes in CPI.

Question 28

CPI

Answer 28

Customer Price Index

Question 29

These bonds have no inflation risk

Answer 29

TIPS

Question 30

Short government debt with maturities of 1 year or less

Answer 30

T-Bills

Question 31

T- Bills

Answer 31

Priced at a discount and mature at par with no periodic interest payments

Question 32

Tax-free equivalent yield (equation)

Answer 32

corporate yield x (100%- tax bracket)

Question 33

call protection

Answer 33

the time between the issue date and the first potential call.

Question 34

par value

Answer 34

face value for a bond is 1000

Question 35

Issuers pay investors interest semi annually and the principal at maturity

Answer 35

Bond

Question 36

Guarantee Bonds

Answer 36

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.

Question 37

Discount bond

Answer 37

bonds trading in the secondary market at a price lower than par.

Question 38

Inverse relationship (bonds )

Answer 38

when rates in the market increase, bond prices decrease.

Question 39

treasury receipt

Answer 39

backed by the interest and principal of treasury securities owned by the BD. Not a direct obligation of the U.S. government

Question 40

Zero- coupon security, similar to a Treasury STRIP, that is created by BDs

Answer 40

Treasury Receipt

Question 41

Debentures

Answer 41

unsecured corporate debt, backed by the full faith, credit and promise to pay.

Question 42

these are long-term unsecured debt, as opposed to commercial paper, which is short term unsecured debt

Answer 42

debentures

Question 43

money market securites

Answer 43

short-term debt instruments with 1 year or less to maturity, highly liquid with safety of principal

Question 44

T-bills, commercial paper, BAs, CDs and government debt with less than 1 year until maturity are all

Answer 44

Money market securities

Question 45

call risk

Answer 45

loss of income due to early retirement of a callable issue of bonds.

Question 46

when will issuers call in bonds?

Answer 46

when interest rates fall. The most likely to be called are high interest rate, with low call premium

Question 47

Trust indenture

Answer 47

the legal agreement that outlines the terms of the loan between the issuers and bondholders.

Question 48

general obligation municipal bonds (GO)

Answer 48

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

Question 49

collateralized mortgage obligations (CMO)

Answer 49

a pool of mortgages that divide interest and principal into separate tranches

Question 50

These obligations are subject to prepayment risk when interest rates decline in the market, and extension risk when rates in the market rise

Answer 50

CMOs ( collateralized mortgage obligations)

Question 51

municipal bonds (revenue bonds)

Answer 51

these bonds are backed by users' fees, such as toll roads, parking structures, airports, or convention centers. This is a self supporting debt.

Question 52

tax equivalent yield (equation)

Answer 52

municipal yield / (100% - tax bracket)