Debt Securities Flashcards
What is the assumed par value for bonds
1K
Whats another name for the par value
the principal
face value
What are the different maturities for bonds
term
serial
balloon
What is a term bond
mature all at once
What is a serial bond
portions oof the bond mature over time
What is a balloon bond
combo of serial and term, small pay back before maturity date then the majority at maturity
What is a coupon rate
the interest rate
Instead of coupon rate, what might the interest rate fo a bond be called
nominal yield
stated yield
How is bond pricing measured
in points with a point being 1% of par
bond is trading at 90
but really its 90 X 10 so 900
for the overall yield of a bond, what are the different ways to calculate it
coupon/nominal
Current yield: take the annual coupon paid out / market price
Yield to Maturity: if held to maturity than this measure the return by considering a discount or premium at purchase
Yield to Call: bond can be called to be redeemed by the issuer before maturity
If you see a bond trading on a “basis of” then
see if it then provides a yield if it does then the yield is YTM
What is a call and put feature of a bond
call - the issuer can call the bond mature now
Put - the owner of the bond can sell the bond back to the issuer
Why would a put feature on a bond be advantageous
if market coupons rise to 8% when you have a 6% coupon, then you can sell the bond back, and reinvest at market coupon
With call features on bonds what is a coupon consideration
likely needs to be higher to compensate for the risk of being called
What is a put feature on a bond
exact opposite of a call feature
What is it called when a convertible bond is valued exactly at the price of the shares it can convert into
parity
Zero coupon bonds issued by the Treasury are called
STRIPS
A basket of STRIPS made by a BD is called
Treasury receipts
What is the main difference between treasury receipts and STRIPS
Treasury receipts arent backed by the gov
What can enhance the safety of a debt security
collateral
What is the general layout of the letter grades for bonds
A is slightly susceptible to economic conditions
BBB slightly speculative and is the last of investment grade
BB significant chance the issuer could miss an interest payment
Everything below BB \ Ba could miss interest payments
Why are bond prices and interest rates inverse
if you have a bond at 5% and the interest rate drop to 3%, the new bonds will be 3% so your 5% bond is more valuable
What bonds are considered secured debt
mortgage bonds
equipment Trust certificates (like having the train cars of a railroad company be the collateral to the loan that bought them)
collateral trust bonds (the collateral are treasury stocks or stocks and bonds from other issuers)
Consideration for collateral trust bonds
the stock or bond collateral must be liquid
Examples of unsecured debt
debentures (corporate bonds back only by an IOU)
Guaranteed bonds (same as debentures but parent company picks up the bill if the issuing corp defaults)
income bonds (after reorg or default, the corp only pays interest if it has enough income)
Subordinated debt (the lowest level of any unsecured debt)
What debt securities settle T+2 and accrue interest on a 30mo/360day year
Corp debt
munis
What are the types of munis
GO bonds
revenue bond
What is a GO bond
issued for a capital improvement
usu doesnt produce income so interest is paid by other revenue sources
usu require voter approval
What are revenue bonds
the prin and int are supported by the income that project gens
usu doesnt need voter approval
What is a consideration of a revenue bond from an authority
Each bond from them may only be backed by a portion of the auths income not all
ex: a bond for a bridge only back by the income from that bridge
What are the different US Treasury debts in order of maturity
T bills
T notes
Tbonds
Characteristics of T bills
less than a year
no interest instead sold at discount to par then redeemed at par at maturity
the 13wk/90day T bill is oft used in market analysis as the risk free investment
Characteristics of T notes
2-10 years
semiannual interest
Characteristics of T bonds
10-30 years
semiannuual interest
What is the settlement time and interest accrual schedule of US Treasury securities
T+1
interest on actual days elapsed
What are TIPS
Treassury Inflation protected secs
What are some considerations with TIPS
Value of the principal adjusts with inflation every 6mo
interest paid ev 6mo
Payment at will never be less than the 1000 par
Who else is given auth to issue national gov debt
Farm credit admin
Fannie mae
Freddy mac
Ginnie mae
Characteristics of ginnie mae secs
backed by US
oversees HUD
What kind of risk would be associated with ginnie mae
prepayment risk if matured early (aka people paid off their mortgages early)
Freddy mac does what
helps create a secondary market for mortgages by creating MBS’s
Fannie mae does what
buys mortgages from FHA and VA
What are money market secs
fixed income debt secs with 1yr or less to maturirty
What are some examples of money market securities
Jumbo CDs
Bankers acceptances
Commercial paper
T bills
Repos
Federal funds loans
What are jumbo CDs
an unsecured promissory note from a bank that is sold at face value and pays interest at maturityW
consideration for bank issue/jumbo CDs
only considered money market instrument if traded on secondary market
What are Bankers acceptances
maturity of less than 270
discount to par
often usu by import export businesses
What is commercial paper
270 or less maturity
unsecured debt from a corp
What consideration for T notes and bonds and money market secs
if less than a year to maturity, they are considered money market instruments
What are Repos
agreement to sell an asset now and repurchase for a slightly higher price later
What are federal funds loans
member banks of the Federal Reserve Board need to maintain certain reserve with them and if their is excess the FED can overnight loan to other members so they can maintain they reserve requirements
What are some asset backed secs
CMOs
CDOs
What are CMOs
collateralized mortgage obligations
pools of mortgages sctructured into maturity classes called tranches
How are P&I structured with CMOs
both paid monthly but the principal is paid one tranche at a time
What can effect the flow of P&I of a CMO to its investors and why
changes to interest rates bec of refinancing
What are CDOs
mult types of debt usu not mortgages
What are the debt types and their risks called for CMOs and CDOs
tranches or slices
What are tranches or slices
maturity classes of CDO or CMO that come with their own risk/reward combos
