Debt Securities - Corp and U.S. Flashcards
1
Q
Maturity
A
Bond holder receives par value plus any interest due.
2
Q
Bond Prices
A
Bond prices are quoted as a percentage of par value, most often without the percent sign. A bond trading at 100 is trading at 100 percent of $1,000 par.
3
Q
Corporate Bond Quoted
A
Corporate bonds are usually quoted in increments of ⅛ percent (⅛% = 0.00125 or $1.25), so a corporate bond quoted at 99⅜ (99.375 percent) would be trading at $993.75.
4
Q
Coupon Rate
A
tells the investors how much annual interest they’ll receive.
Assume bonds pay interest semi-annually
5
Q
Bond Indenture
A
The indenture (also known as deed of trust or resolution) is the legal agreement between the issuer and its bondholders, and is printed on or attached to the bond certificate.
All indentures contain basic terms: The maturity date
The par value
The coupon rate (interest rate) and interest payment dates
Any collateral securing the bond
Any callable or convertible features (check out
6
Q
Trustee
A
A trustee is an organization that administers a bond issue for an institution; it ensures that the bond issuer meets all the terms and conditions associated with the borrowing.
7
Q
Term Bonds
A
are all issued at the same time and have the same maturity date.
8
Q
Sinking Fund
A
A corporation creates a sinking fund when it sets aside money over time in order to retire its debt. Investors like to see that a sinking fund is in place
9
Q
Series Bonds
A
These bonds are issued in successive years but have only one maturity date. Issuers of series bonds pay interest only on the bonds that they’ve issued so far.
Construction companies
10
Q
Serial Bonds
A
In this type of bond issue, a portion of the outstanding bonds matures at regular intervals. (Perhaps 10 percent of the entire issue matures yearly.) Serial bonds are usually issued by corporations and municipalities to fund projects that provide regular income stream.
11
Q
Balloon Issue
A
A serial bond that has more bonds maturing on the final maturity date is called a balloon issue.
12
Q
Mortgage Bonds
A
These bonds are backed by property that the issuer owns.
open-end mortgage bond, the issuer may borrow more money by using the same property as collateral. With a closed-end mortgage bond, the issuer can’t borrow more money by using the same property as collateral
13
Q
Equipment Trusts
A
These bonds are issued mainly by transportation companies and is backed by equipment they own
14
Q
Collateral Trusts
A
These bonds are backed by financial assets (stocks and bonds) that the issuer owns. A trustee (a financial institution the issuer hires) holds the assets and would sell them to pay off the bonds in the event of default.
15
Q
Guaranteed Bonds
A
Guaranteed bonds are backed by a firm other than the original issuer, often a parent company. If the issuer defaults, the guarantor pays off the bonds. As such, the rating of the bonds is tied to the rating of the guarantor
16
Q
Debentures
A
These bonds are backed only by the issuer’s good word and written agreement (the indenture) stating that the issuer will pay the investor interest when due (usually, semiannually) and par value at maturity.
17
Q
Income (adjusted) Bonds
A
These bonds are the riskiest of all. The issuer promises to pay par value back at maturity and will make interest payments only if earnings are high enough. Companies in the process of reorganization usually issue these bonds at a deep discount.
18
Q
Nominal Yield
A
Coupon rate on the face of the bond.
19
Q
Current Yield
A
(CY) is the annual rate of return on a security. The CY of a bond changes when the market price changes. You can determine the CY by dividing the annual interest by the market price:
20
Q
Yield to Maturity (YTM)
A
The yield to maturity (YTM) is the yield an investor can expect if holding the bond until maturity. The YTM takes into account not only the market price, but also par value, the coupon rate, and the amount of time until maturity.
21
Q
Yield to Worst
A
To determine the yield to worst (YTW), you have to calculate the yield to maturity and YTC for all the call dates (if there’s more than one) and choose the lowest. If you get a question on YTW, knowing the definition should be enough to get you by
21
Q
Yield to Call
A
The yield to call (YTC) is the amount that the investor receives if the bond is called prior to maturity.
22
Q
Total Return
A
The total return calculates the full return on a particular investment over a given period of time.
Determine the initial cost of the investment. Calculate the total amount of interest or dividends received over the time of investment. Add the interest or dividends to the selling price. Divide that number by the initial cost of the investment, and subtract
23
Q
Investment Grade
A
The top four ratings are considered to be investment grade (AAA, AA, A, and BBB for S&P; Aaa, Aa, A, and Baa for Moody’s), and the letter ratings below that are considered to be junk bonds or high-yield bonds.
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Callable Bonds
A callable bond is a bond that the issuer has the right to buy back from investors at the price stated on the indenture (deed of trust).
25
Call Protection
protection is the amount of time (usually, several years) that an issuer has to wait before calling its bonds (such as five years after issuance).
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Call Premium
which is an amount over par value that an issuer has to pay if it calls its bonds in the year(s) immediately following the expiration of the call protection.
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Make Whole Call Provision
it allows the issuer to call the bonds provided that the issuer makes a lump-sum payment to investors that includes not only payment for the bond, but also the present value of any future interest payments investors will miss because of the call.
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Step Coupon Bonds
or step-up coupon securities, step coupon bonds typically start at a low coupon rate, but the coupon rate increases at predetermined intervals, such as every five years. The issuer typically has the right to call the bonds at par value at the time the coupon rate is due to increase.
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Put Bonds
are better for investors. Put bonds allow the investor to “put” the bonds back (redeem them) to the issuer at any time at the price stated on the indenture.
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Convertible Bonds
Able to convert to common stock. Parity occurs when a convertible bond and its underlying stock (the stock it’s convertible into) are trading equally
31
Conversion Ratio
Par Value / Conversion Price
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Government Securities Risks
interest risk, reinvestment risk, purchasing power risk, and so on
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Treasury Bills
4, 8, 13, 26, 52. Short term
Issued at discount and mature at Par. This is the interest rate the difference between purchase and par.
34
Treasury Notes
2,3,5 & 7 years. Considered intermediate. Interest payments every 6 months.
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Treasury Bonds
30 Years. Considered long term. Pays interest rates every 6 months.
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T-STRIPS
Separate Trading of Registered and Principal Securities.
6 Months to 3 Years
Sold at Discount, mature at Par.
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TIPS
Treasury Inflation Protected Securities. Tied to CPI
5,10 & 30 years
Pay interest every 6 months. Par value and interest payments adjust according to inflation or deflation.
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Agency Bonds
Agency bonds are ones issued by a U.S. government-sponsored agency or government-sponsored entities(GSE).
The bonds are backed by the U.S. government, but not all are guaranteed by the full faith and credit of the U.S. government except for Government National Mortgage Association (GNMA)
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GNMA (Government National Mortgage Association, or Ginnie Mae)
the only agency securities backed by the full faith and credit of the U.S. government. GNMAs support the U.S. Department of Housing and Urban Development (HUD).
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FNMA (Federal National Mortgage Association, or Fannie Mae)
FNMA is a publicly held corporation that is responsible for providing capital for certain mortgages.
FNMA is privately owned and publicly held but is still a GSE.
41
FHLMC (Federal Home Loan Mortgage Corporation, or Freddie Mac)
designed to create a secondary market for mortgages. Freddie Mac purchases residential mortgages from financial institutions and packages them into mortgage-backed securities that are sold to investors.
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FCS (Farm Credit System)
The FCS consists of lending institutions that provide financing and credit to farmers. It’s a GSE but is privately owned.
42
SLMA (Student Loan Marketing Association or Sallie Mae)
SLMA isn’t involved in providing mortgages but provides a secondary market for student loans. As such, SLMA purchases student loans and repackages them as short- and medium-term debt securities for sale to investors.
43
Money Market Instruments
relatively safe short-term loans that can be issued by corporations, banks, the U.S. government, and municipalities. Most of these instruments have maturities of one year or less; they’re usually issued at a discount and mature at par value.
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Repurchase Agreements
Repurchase agreements (repos) are a contract between a buyer and a seller. The seller of the securities (usually, T-bills) agrees to buy them back at a previously determined price and time. Repos are short-term loans.
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Federal Funds
Federal funds are loans between banks to help meet reserve requirements. Federal funds are usually overnight loans for which the rates change constantly depending on supply and demand.
46
Commercial Paper
Commercial paper is unsecured short-term corporate debt. Commercial paper is issued at a discount and matures at par value. Commercial paper is issued with an initial maturity of 270 days or less and is exempt from SEC registration.
47
Brokered CD's
originate from a bank and are outsourced to broker–dealers to sell to investors. Unlike typical CDs, which are purchased directly from a bank, brokered CDs can be traded in the market. Negotiable CDs that require a minimum investment of $100,000 are often called jumbo CDs.
48
Eurodollars
Eurodollars are American dollars held by a foreign bank outside the United States. This situation is usually the result of payments made to overseas companies.
49
Bankers Acceptances
A BA is a time-draft (short-term credit investment) created by a company whose payment is guaranteed by a bank. Companies use BAs for importing and exporting goods.
50
T-Bills
The U.S. government issues T-bills at a discount, and they have initial maturities of 4, 8, 13, 26, or 52 weeks. T-bills are somewhat unique in that they’re sold and quoted on a discount-yield basis (YTM).
51
General Obligation Bonds
GO bonds aren’t self-supporting because municipalities issue them to build or support projects that don’t bring in enough (or any) money to help pay off the bonds. GOs fund schools, libraries, police departments, fire stations, and so on.
They’re backed by the full faith and credit (taxing power) of the municipality. The taxes of the people living in the municipality back GO bonds.
They require voter approval.
52
Revenue Bonds
are issued to fund municipal facilities that will generate (or ideally will generate) enough income to support the bonds. These bonds raise money for certain utilities, toll roads, airports, hospitals, student loans, and so on.
53
Industrial Development Revenue Bonds (IDR's)
to finance the construction of a facility for a corporation that moves into that municipality. Even though a municipality issues IDRs, they’re backed by lease payments made by a corporation.
IDRs are generally considered to be the riskiest municipal bonds.
May not be federal tax free.
54
Revenue Bond Covenants
Rate, Maintenance and Insurance
55
True Interest Cost
Considers the time value of money
56
Bond Spread
The difference between what the underwriter paid the issuer and the amount they sell the bonds in the market.
57
Municipal Advisors
are firms or professionals that provide professional advice on bond sales and other financial advice to state and local governments.
58
Allocation of Orders
Syndicate must communicate in order how the orders will be filled.
1. Presale Orders
2. Syndicate Orders
3. Designated Orders
4. Member Orders
59
Date of Sale (Municipal Bonds)
The date of sale is the date when the bids are submitted to the issuer for competitive offerings.
60
Presale Period
The presale period is the period preceding the date of sale.
61
Special Tax Bonds
These bonds are secured by one or more taxes other than ad valorem (property) taxes. The bonds may be backed by sales taxes on fuel, tobacco, alcohol,
61
Order Period
The order period is the time (established by the syndicate manager) during which syndicate members may solicit customers.
62
Underwriting Period
The underwriting period begins when the first order is submitted to the syndicate or when the securities are purchased from the issuer, whichever happens first. The underwriting period ends when the issuer delivers securities to the syndicate or the syndicate sells all the securities purchased from the issuer, whichever happens last.
63
Special Assessment (special district) Bonds
These bonds are issued to fund the construction of sidewalks, streets, sewers, and so on. Special assessment bonds are backed by taxes only on the properties that benefit from the improvements.
64
Double Barreled Bonds
These bonds are a combination of revenue and GO bonds. Municipalities issue these bonds to fund revenue-producing facilities (toll bridges, water and sewer facilities, and so on), but if the revenue taken in isn’t enough to pay off the debt, tax revenue makes up the deficiency.
65
Limited-tax general obligation bonds (LTGO)
These bonds are GO bonds for which the taxes backing the bonds are limited. LTGO bonds are secured by all revenue of the municipality that isn’t used to back other bonds. The amount of property taxes municipalities can levy to back these bonds is limited, however. If the bond is backed by an unlimited tax pledge, the municipality can raise property tax rates to ensure that the bonds can be paid off.
66
Public Housing Authority Bonds (PHA)
(PHAs): These bonds, also called new housing authority (NHA) bonds, are issued by local housing authorities to build and improve low-income housing
67
Moral Obligation Bonds
These bonds are issued by a municipality but backed by a pledge from the state government to pay off the debt if the municipality can’t.
68
Build America Bonds
to help municipalities raise money for infrastructure projects such as tunnels, bridges, roads, and so on. These bonds have either a higher coupon rate than most other municipal bonds because the municipality receives tax credits from the federal government or are more attractive because the investors receive tax credits from the federal government.
69
Tax Credit BAB's
Investors in these bonds receive tax credits equal to 35 percent of the coupon rate.
70
Direct Payment BAB's
When a municipality issues Direct Payment BABs, it receives reimbursements from the U.S. Treasury equal to 35 percent of the coupon rate. As a result, Direct Payment BABs tend to have a higher coupon rate than Tax Credit BABs.
71
529 Savings Plans
contributions are made from after-tax dollars. Withdrawals of the amount invested plus interest received is tax-free
The assets in the account always remain under the control of the owner (donor) even after the beneficiary becomes of legal age (18, in most states).
72
ABLE Accounts
ABLE (Achieving a Better Life Experience) programs are designed for people with provable disabilities and their families.
ABLE accounts may be opened by the eligible person, a parent or guardian, or a person granted power of attorney on behalf of the person with the disability.
72
Local Government Investment Pools (LGIP)
are established by states to provide other government entities (cities, counties, school districts, and so on) a short-term investment vehicle for investing their funds.
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Taxable Equivalent Y
The taxable equivalent yield (TEY) tells you what the interest rate of a municipal bond would be if it weren’t federally tax-free. You need the following formula to compare municipal bonds and corporate bonds equally:
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Annuities
Life Insurance companies issue annuities. and these investments provide guaranteed payments for the life of the holder.
74
Triple Tax Free Bonds (Fed, State, Local)
Puerto Rico Guam U.S. Virgin Islands American Samoa Washington, D.C.
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Real-Time Reporting System
RTRS makes public reports on market activity and prices. In addition, the MSRB assesses transaction fees to make sure that they’re in line with MSRB rules. The information of a transaction must be reported promptly. Exempt from the reporting process are transactions in securities without a Committee on Uniform Security Identification Procedures (CUSIP) number, transactions in municipal fund securities, and interdealer transactions.
76
Brokerage Firm Advertising
A brokerage firm has to keep all advertising for a minimum of three years, and these ads must be easily accessible (not in a bus storage locker) for at least two years.
The MSRB requires a principal (manager) to approve all advertising material of the firm before its first use.
77
Gift Rules
According to MSRB rules, municipal securities dealers can’t give customers gifts valued at more than $100 per year.
You should note that FINRA gift rules fall directly in line with MSRB’s gift rules.
78
Commission Rates
1. Market value of the securities
2. Total dollar amount
3. Difficulty of the trade
4. Entitled to make a profit
79
The Bond Resolution (Indenture)
A bond resolution (indenture) provides investors contract terms including the coupon rate, years until maturity, and collateral backing the bond (if any).
Not required by law.
80
Legal Opinion (Municipal Bond)
The purpose of the legal opinion is to verify that the issue is legally binding on the issuer and conforms to tax laws.
If a bond is stamped ex-legal, it doesn’t contain a legal opinion.
81
Official Statement
Like prospectuses, official statements come in preliminary and final versions. The preliminary version of the statement doesn’t include an offering price or coupon rate. The official statement (OS) is the document that the issuer prepares or has prepared; it states what the funds will be used for, provides information about the municipality, and details how the funds will be repaid.
82
Rule G-2 (standards of professional qualifications)
the dealer and every person associated with that dealer must be qualified in accordance with MSRB rules.
83
Rule G-3 (professional qualification requirements):
must have at least one associated person qualified as a municipal securities principal to oversee and supervise their municipal securities business.
84
Rule G-7 (information concerning associated persons)
must provide their employer a form U-4 or MSD-4 for bank dealers. A U-4 form is an application form sent to the Central Registration Deposit (CRD) along with the applicant’s fingerprints.
85
Rules G-8 and G-9 (books and records requirements)
86
Rule G-9
Rule G-9 (preservation of records): MSRB’s record-keeping requirements are very similar to but not exactly the same as FINRA’s requirements. Most records have to be kept for four or six years
87
88
Rule G-10 (delivery of investment brochure)
Broker–dealers and municipal securities dealers must send yearly written statements (which may be electronic) to each customer, stating that they’re registered with the SEC and MSRB.
89
Rule G-13 (quotations)
According to MSRB rules, all quotations for municipal securities published or distributed by any broker–dealer, municipal securities dealer, or person associated with a broker–dealer or municipal securities dealer must be genuine.
90
Rule G-17 (conduct of municipal securities and municipal adviser activities)
Municipal securities broker–dealers, municipal securities dealers, municipal advisers, agents, and so on shall deal fairly with all people and not engage in dishonest, deceptive, or unfair practices.
91
Rule G-21 (advertising)
Advertisements by municipal securities dealers, brokers, and dealers can’t contain false or misleading statements.
91
Rule G-18 (best execution)
When entering into a municipal securities transaction with a customer or customer of another broker, dealer, or municipal securities dealer, a broker must use reasonable diligence to attempt to get the best price
92
Rule G-25 (improper use of assets)
Brokers, dealers, and municipal securities dealers shall not make improper use of municipal securities or funds held on behalf of another person. In addition, no broker, dealer, or municipal securities dealer can make a guarantee against loss, and they may not share directly or indirectly
93
Rule G-30 (pricing and commissions)
If buying or selling municipal securities for a customer on a principal basis (for or from the dealer’s inventory), the aggregate price including the markdown or markup must be fair and reasonable
94
Rule G-34 (CUSIP numbers, new issue and market information requirements)
For new issues of municipal bonds (whether negotiated or competitive offerings), the managing underwriters must apply to CUSIP to receive identification numbers for the bonds for each maturity, if more than one. For negotiated offerings in which the underwriter is chosen directly, the managing underwriter must apply before the pricing of the new municipal issue.
95
Rule G-37 (political contributions and prohibitions on municipal securities business)
This rule prohibits brokers, dealers, municipal securities dealers, and municipal advisers from engaging in municipal adviser business with municipal entities if they’ve made political contributions to officials of such municipal entities.
Municipal finance professionals are allowed to make political contributions of up to $250 per election to a candidate they’re entitled to vote for.
96
Rule G-47 (time of trade disclosure)
Brokers, dealers, and municipal securities advisers may not trade a municipal security (buy from or sell to) with a customer (whether solicited or unsolicited) without providing all material information about the trade. The information must be provided before or at the time of sale and can be disclosed orally or in writing.
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99
100
101
102
103
Fixed Annuities
Have fixed rates of return.
fixed annuities are not considered securities and therefore are exempt from SEC registration requirements and from the Investment Company Act of 1940.
Risk to inflation
104
Variable Annuities
Because the investors assume the investment risk, variable annuities are considered securities and must be registered with the SEC. All variable annuities have to be sold with a prospectus, and only individuals who hold appropriate securities and insurance licenses can sell them.
105
Assumed Interest Rate
(AIR) is a projection of the performance of the securities in the separate account over the life of the variable annuity contract.
106
Annuity Death Benefit
contracts require a death benefit to be paid to the annuitant’s beneficiary. The death benefit is typically the greater of all the money in the account or some guaranteed minimum.
107
Single Payment Deferred Annuity
An investor purchases the annuity with a lump-sum payment, and the payouts are delayed until some predetermined date.
107
An investor makes periodic payments (usually monthly) into the annuity, and the payouts are delayed until some predetermined date; this is the most common type of annuity
107
Periodic Payment Deferred Annuity
An investor makes periodic payments (usually monthly) into the annuity, and the payouts are delayed until some predetermined date; this is the most common type of annuity.
107
Immediate Annuity
An investor purchases the annuity with a large sum, and the payouts begin right away or within a couple months.
108
Waiver of Premium
Most annuities in which investors are making scheduled deposits provide a waiver of premium during the pay-in phase if the annuitant becomes disabled or is confined to long-term care.
108
Annuity Payout Phase
During the payout phase of a variable annuity, accumulation units are converted into a fixed number of annuity units. Investors receive a fixed number of annuity units periodically (usually monthly) with a variable value, depending on the performance of the securities in the separate account.
108
Life Annuity
This type of payment option provides income for the life of the annuitant (the individual covered by the annuity); however, after the annuitant dies, the insurance company stops making payments.
109
Life Annuity with Period Certainty
This payout option guarantees payment to the annuitant for a minimum number of years (10, 20, and so on).
110
Joint life with last survivor annuity
This option guarantees payments over the lives of two individuals.
111
Variable Life Insurance Policies
Fixed Premium
The death benefit may increase depending on the performance of the securities held in the separate account. If the separate account performs poorly, there may be limited or no cash value built up. Policyholders may borrow up to 75 percent of the cash value.
112
Variable Universal Life Insurance
policies do not have fixed premiums. As such, they are sometimes called flexible premium variable life policies.
the minimum death benefit and cash value are not guaranteed.
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