Fixed Income

Question 1

What is Par?

Answer 1

Face value of loan

Question 2

What is the coupon rate?

Answer 2

Interest payments for the loan

Question 3

What is the call provision?

Answer 3

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.

Question 4

Who insures CDs?

Answer 4

FDIC/NCUA

Question 5

What is a commercial paper?

Answer 5

unsecured ST promissory note

Question 6

What is Banker’s Acceptance (BA) for?

Answer 6

Finance foreign trade

Question 7

Money Rates Listing?

Answer 7

Interest rates on money market instruments aka bank discount basis

Question 8

Mortgage pass-through securities (GNMA, FNMA, FHLMC)?

Answer 8

Pools of mortgages where investors buy certificates to receive pro rata return of P&I on underlying mortgages

Question 9

Collateralized Mortgage Obligations (CMOs)

Answer 9

Way to allocate mortgage pool’s P&I payments among investors according to prepayment risk preferences

Question 10

Stripped Mortgage-Backed Securities

Answer 10

Offer significantly different price/yield relationship compared to traditional mortgage pass -through securities -aka IO interest only and PO principal only

Question 11

What are US Treasury marketable securities?

Answer 11

T-Bills <1yr
T-Notes 1-10 yrs
T-Bonds 10-30 yrs
TIPS,0 coupon bonds, STRIPS

Question 12

Municipal bond types

Answer 12

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

Question 13

Tax treatment of muni bond

Answer 13

Coupons are tax exempt at Federal level
If issued by city/state of residence, then income may be exempt
Capital appreciation is taxable

Question 14

How are municipal bonds usually issued?

Answer 14

As serial bonds, since there is not a strong secondary market

Question 15

Types of corporate bonds

Answer 15

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.

Question 16

TEY (Tax equivalent yield)

Answer 16

tax free rate/(1-marginal tax bracket)

Question 17

Eurodollar CDs

Answer 17

large, ST CDs denominated in U.S. dollars and issued by banks outside the United States- negotiable/can be traded.

Question 18

A municipal bond backed by the taxing authority of the issuer is known as a

Answer 18

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.

Question 19

Revenue bonds may be issued for

Answer 19

-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

Question 20

What type of corporate bond is secured by a specific piece of equipment?

Answer 20

Equipment obligation bonds are backed by specific pieces of equipment, which could be sold to service the bond.

Question 21

If prevailing rates are 3%, a bond with a coupon of 4.5% is likely trading at ___________.

Answer 21

premium

Question 22

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 __________________.

Answer 22

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.

Question 23

A municipal bond backed by the taxing authority of the issuer is known as a ____________

Answer 23

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.

Question 24

Place the following yields in order from highest to lowest on a premium bond.

Yield to Maturity
Current Yield
Nominal Yield
Yield to Call

Answer 24

Yields on a premium bond, from highest to lowest, are as follows:

Nominal Yield
Current Yield
Yield to Maturity
Yield to Call