Fixed Income Flashcards
What is Par?
Face value of loan
What is the coupon rate?
Interest payments for the loan
What is the call provision?
When interest rates decrease and issuers want to pay their debt off early by calling their outstanding debt and reissuing debt at a lower financing cost.
Who insures CDs?
FDIC/NCUA
What is a commercial paper?
unsecured ST promissory note
What is Banker’s Acceptance (BA) for?
Finance foreign trade
Money Rates Listing?
Interest rates on money market instruments aka bank discount basis
Mortgage pass-through securities (GNMA, FNMA, FHLMC)?
Pools of mortgages where investors buy certificates to receive pro rata return of P&I on underlying mortgages
Collateralized Mortgage Obligations (CMOs)
Way to allocate mortgage pool’s P&I payments among investors according to prepayment risk preferences
Stripped Mortgage-Backed Securities
Offer significantly different price/yield relationship compared to traditional mortgage pass -through securities -aka IO interest only and PO principal only
What are US Treasury marketable securities?
T-Bills <1yr
T-Notes 1-10 yrs
T-Bonds 10-30 yrs
TIPS,0 coupon bonds, STRIPS
Municipal bond types
GO general obligation bonds that are backed by the taxing power of the municipality
Revenue bonds that are backed by revenue generated from a project/authority/agency
Tax treatment of muni bond
Coupons are tax exempt at Federal level
If issued by city/state of residence, then income may be exempt
Capital appreciation is taxable
How are municipal bonds usually issued?
As serial bonds, since there is not a strong secondary market
Types of corporate bonds
Mortgage bonds: debt secured by the pledge of specific property.
Collateral trust bonds: backed by other securities that are usually held by the trustee.
Equipment Obligations: backed by specific pieces of equipment.
Debentures: general obligations of the issuing corporation=> represent unsecured credit.
Asset-backed securities: like participation securities: People pool loans and sell securities that represent part ownership of the pool.
Convertible bonds: securities that can be converted into different securities of the same firm under certain conditions.
TEY (Tax equivalent yield)
tax free rate/(1-marginal tax bracket)
Eurodollar CDs
large, ST CDs denominated in U.S. dollars and issued by banks outside the United States- negotiable/can be traded.
A municipal bond backed by the taxing authority of the issuer is known as a
General obligation bonds are backed by the full faith and credit of the issuer. If the issuer were to miss a principal or interest payment, they would raise taxes to meet the obligation.
Revenue bonds may be issued for
-financing publicly owned utilities,
-financing quasi-utilities, like transportation,
-financing by levying a tax on properties that benefit from the expenditure, for example a new sewer system, and
-Industrial Development Bonds are used to finance the purchase or construction of industrial facilities
What type of corporate bond is secured by a specific piece of equipment?
Equipment obligation bonds are backed by specific pieces of equipment, which could be sold to service the bond.
If prevailing rates are 3%, a bond with a coupon of 4.5% is likely trading at ___________.
premium
Julian purchased a AAA-rated corporate bond with a 6.25% coupon at par. One year later, prevailing coupons on bonds of similar quality and time to maturity are 5.75%.
Julian’s bond can be categorized as a __________________.
When interest rates decrease below the stated interest of the debt (the coupon rate), the security will be worth more since new debt pays less interest. Therefore, the market price for the debt would be above par value, otherwise known as a premium bond.
A municipal bond backed by the taxing authority of the issuer is known as a ____________
General obligation bonds are backed by the full faith and credit of the issuer. If the issuer were to miss a principal or interest payment, they would raise taxes to meet the obligation.
Place the following yields in order from highest to lowest on a premium bond.
Yield to Maturity
Current Yield
Nominal Yield
Yield to Call
Yields on a premium bond, from highest to lowest, are as follows:
Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
