Debt Securities

Question 1

Corporate Bonds
when does interest pay?
how is it taxed?
can they be convertible?
good for maximizing income?

Answer 1

Interest paid every 6 months
Interest taxed at all levels
Convertible bonds
Avoid if looking to maximize income

Question 2

Callable

Answer 2

Has reinvestment risk when called

Question 3

High yield bonds

Answer 3

Speculative
High default risk, high coupon
NOT good for conservative investors seeking income

Question 4

Zero coupon bonds

Answer 4

No interest paid until maturity
Good for target investment (college)
Greatest sensitivity to interest rate risk

Question 5

Income bonds

Answer 5

Speculative

Not good for investors seeking income

Question 6

Collateralized mortgage obligations (CMOs)

Answer 6

Not suitable for small or unsophisticated investors

Question 7

Money Market Securities

Answer 7

Safety of principal
Banker’s acceptances
Commercial Paper
CDs

Question 8

United States government debt (Treasury securities)
Interest is tax exempt at what level?
WHY would you buy?

Answer 8

Safest debt when it comes to credit risk (NO default)
Interest is tax-exempt at state and local level
Purchased for income and safety

Question 9

Bills- Pay interest? when?

notes and bonds- pay interest? when?

Answer 9

Bills issued at a discount

Notes and bonds pay semiannual interest

Question 10

TIPS

Answer 10

principal keeps pace with inflation

Question 11

Agency Issues (GNMA, FHLMC, FNMA)
How is interest taxed?

Answer 11

interest payments taxed at all levels 
Very safe (2nd to govt. debt in terms of default risk)

Question 12

GNMA

Answer 12

Only agency issue backed by the full faith and credit of the US government.
Interest paid monthly

Question 13

FHLMC and FNMA

Answer 13

Interest paid every 6 mos.

Question 14

Bond laddering

Answer 14

Increases liquidity

Not suitable for investors seeking growth