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series 7 take 2 > debt securities > Flashcards

debt securities Flashcards

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Series 7 Top-off Exam flashcards
1
Q

what is the bond yield order?

A
  • nominal (coupon) yield
  • current yield
  • yield to maturity
  • yield to call
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2
Q

interest on debt securities is paid how often?

A

semi annually

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3
Q

one point =

A

$10

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4
Q

100 basis points =

A

1%

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5
Q

if interest rates go up, price go..

A

down

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6
Q

if interest rates go down, prices go..

A

up

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7
Q

coupon yield formula:

Ex. Bond pays $60 annual interest, what is the coupon yield?

A

annual interest / par value

$60 / $1,000 = 6% coupon yield

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8
Q

current yield formula:

Ex. Bond trading at $1,200 pays $60 annual interest, what is the current yield?

A

annual interest / current market value

$60 / $1,200 = 5% current yield

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9
Q

basis / yield refers to =

A

yield to maturity

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10
Q

describe a price bond quote

A

1 bond point = 1% of par = 10$

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11
Q

describe a yield bond quote

A

1 basis point = .01 of yield

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12
Q

calculate price:

bond trading @ 92

A

92 = 92% of par = .92(1,000) = $920

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13
Q

calculate yield:

bond trading to yield 3.70

A

.01(3.70) = .037, 3.7%

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14
Q

4% on a 4.50 basis (discount or premium?)

A

discount

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15
Q

7% on a 4.50 basis (discount or premium?)

A

premium

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16
Q

definition of a callable bond

A

bond issued that issuer can buy back as of a specified date prior to maturity at a specified price

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17
Q

issuer will call bonds when..

A

issuer expects current interest rates to fall

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18
Q

callable bonds allows issuer to..

A

lower their cost of borrowing

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19
Q

callable bonds are advantages to the…

A

issuer

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20
Q

describe the effects of callable bonds on investors

A
  • usually higher yields
  • reinvestment risk (investor has lower rate to reinvest money when bonds are called)
  • limits appreciation
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21
Q

describe term maturity of a bond

A

entire issues mature on same date

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22
Q

describe serial maturity of a bond

A

issue matures over a period of years

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23
Q

describe balloon maturity of a bond

A

small repayments initially and larger repayment at maturity

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24
Q

investors buy bonds looking for..

A

steady streams of income

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25
Q

describe convertible bonds

A

bonds that the investor can convert into common shares of stock

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26
Q

calculate conversion ratio:

bond convertible @ $40

A

par / conversion price

$1,000 / $40 = 25 share conversion ratio

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27
Q

calculate parity price of common:
bond trading @ $1,100
conversion ratio = 25 shares

A

market price of bond / conversion ratio

$1,100 / 25 shares = $44 parity price of common

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28
Q

calculate parity price of bond:
bond has 25 share conversion ratio
common trading @ $44

A

conversion ratio x common stock price

25 shares x $44 = $1,100 bond parity price

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29
Q

corporate and municipal bonds calculate accrued interest based on..

A
  • 30 day months / 360 day year
  • regular way settlement (t+3)
  • count up to but do not include settlement date
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30
Q

government securities calculate accrued interest based on..

A
  • actual day months (365 day year)
  • regular way settlement (t+1)
  • count up to but do not include settlement date
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31
Q

what kind of bonds trade flat?

A
  • zero coupon bonds
  • bonds in default
  • income bonds (adjustment bonds)
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32
Q

describe volatility in regards to long-term and short-term bonds given a change in interest rate

A

long term bond prices are more volatile than short term bond prices, given a change in interest rate

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33
Q

describe a normal yield curve

A

the longer the time of the bond, the higher the yield

-slopes up

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34
Q

describe an inverted yield curve

A

the longer the time of the bond, the lower the yield

-slopes down

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35
Q

when is a yield curve inverted?

A

when money is tight and interest rates are high

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36
Q

describe eurodollar deposits

A
  • us dollars invested in banks outside of US

- usually higher risk/yield

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37
Q

describe eurobonds

A
  • issued outside of us and not in us dollars
  • issued in bearer form
  • currency risk for us investors
38
Q

descrive eurodollar bonds

A
  • any issuer except the us govt, payable in us dollars
  • issued in bearer form
  • no currency risk
39
Q

2 types of corporate debt securities

A
  • secured

- unsecured

40
Q

what are the different types of secured bonds?

A
  • mortgage bonds
  • collateral trust bonds
  • equipment trust certificate
41
Q

what are the different types of unsecured bonds?

A
  • debentures
  • subordinated debentures
  • guaranteed bonds
  • income (adjustment) bonds
42
Q

describe mortgage bonds

A

bonds backed by real estate

43
Q

describe collateral trust bonds

A

backed by other securities the issuer owns

44
Q

describe equipment trust certificates

A

backed by equipment used in the issuers business

45
Q

describe debentures

A

backed by issuer full faith and credit

46
Q

describe subordinated debentures

A

paid last of all debt if issuer defaults

47
Q

describe guaranteed bonds

A

bond guaranteed by a third party (parent company)

48
Q

describe income bonds

A

bonds that only pays interest if company is profitable

49
Q

what is the liquidation priority

A
  • wages
  • taxes
  • secured bonds
  • debentures and general creditors
  • subordinated debentures
  • preferred stock
  • common stock
50
Q

describe a sinking fund

A

corporation issues bond and money is put into trust in a bank to cover debt.
-automatically guarantees a AAA rating

51
Q

what are sinking funds used for?

A
  • redeem bonds at maturity
  • call bonds
  • tender offers (offer to buy back bond from investor)
52
Q

what are the advantages of convertible bonds to issuer?

A
  • marketability

- can sell at lower interest rate

53
Q

what are the advantages of convertible bonds to investor?

A
  • safety of debt

- appreciation potential

54
Q

what are the negotiable us govt and agency securities

A
  • t-bills
  • notes and bonds
  • zero coupon bonds
55
Q

t-bills are quoted as a..

A

discount from par

56
Q

how long is a t-bill maturity?

A

one year or less (4,13,26,52)

57
Q

how are t-bills sold?

A

weekly auctions

58
Q

calculate t-bill price:

t-bill quoted @ 1.3%

A

par - discount

100% - 1.3% = 98.7% or $987

59
Q

how long is a t-note maturity?

A

2-10 years

60
Q

t-notes and t-bonds are quoted as a..

A

percentage of par in 32nds

61
Q

how long is a govt t-bond maturity?

A

more than 10 years

62
Q

which is callable? t-bills, t-notes, t-bonds

A

t-bonds

63
Q

calculate t-note or t-bond price:

t-note quoted @ 94.08

A

94% of par + 8/32nds

$940 + 1/4 point ($2.50) = $942.50

64
Q

treasury receipts issued by?

A

-issued by broker dealers

65
Q

treasury strips issued by?

A

-us treasury

66
Q

EE and HH are?

A

savings bonds

67
Q

describe TIPS

A

treasury inflation protection security

-savings bond with adjusted principal based on inflation

68
Q

CMOs are sold by?

A

banks (financial institutions)

69
Q

CMOs are backed by?

A

pool of mortgage securities associated with refinancing risk

70
Q

how are CMOs paid and taxed?

A
  • pay monthly checks (pass through certificates)

- taxed on all levels

71
Q

describe the 3 types of CMO tranches

A

PAC-5 year maturities
TAC-10 year maturities
Z-tranche-more than 10 years

72
Q

all tranches have what kind of risks?

A
  • prepayment

- extension

73
Q

buyer has to sign a ___ in order to purchase a CMO?

A

suitability statement (because they are so risky)

74
Q

what defines money market securities?

A
  • high quality debt
  • one year or less maturity
  • highly liquid
75
Q

describe corporate-commercial paper

A
  • unsecured

- 270 day max maturity

76
Q

describe banker’s acceptances (BAs)

A
  • facilitate foreign trade
  • backed by letter of credit
  • issued at a discount
  • 270 max maturity
77
Q

describe federal farm credit systems

A
  • provide agricultural financing
  • backed by issuers
  • interest exempt from state and local taxes
78
Q

GNMA is backed by?

A

full faith and credit of US govt

79
Q

how are investors of GNMAs paid?

A

monthly check that includes both principal and interest

80
Q

FNMAs and FHLMCs are backed by?

A

issuing agencies

81
Q

GNMAs are taxed on..

A

all levels

82
Q

FNMAs and FHLMCs are taxed on..

A

all levels

83
Q

GNMA, FNMA, and FHLMCs all have what kinds of risk?

A
  • prepayment

- reinvestment

84
Q

when do FNMAs and FHLMCs pay interest?

A

semi-annually

85
Q

describe CDOs

A

pool of non-mortgage backed securities

-can be backed by bonds, auto loans, leases, credit card debt, etc.

86
Q

describe the federal fund interest rate

A

the rate federal member banks charge each other for overnight loans

87
Q

describe the prime interest rate

A

the rate large us money center banks charge their best corporate customers

88
Q

describe the discount interest rate

A

the rate charged by the federal reserve board for loans to depository institutions

89
Q

describe the broker call loan interest rate

A

the rate banks charge broker/dealers for funds borrowed to lend to margin account customers

90
Q

describe interest rates on debt securities from lowest to highest

A
  • federal fund rate
  • discount rate
  • broker call loan rate
  • prime rate
91
Q

the most marketable bonds have..

A
  • short term maturities

- high credit ratings

series 7 take 2 (17 decks)

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