Fixed income Flashcards
Money market funds
specialized investment cos make short term investments in money market instruments - cash and equivalents
T Bill timeframe
3-12 months
How are T Bills sold
discount to face value, 10k to 1mil denominations
Commercial Paper
unsecured short term promissory note issued by highly creditworthy corps - very short term bonds - component of money market funds
Bankers acceptance
short term promissory note guaranteed by a bank
Eurodollars
US Dollars deposited in foreign banks as cash or CDs
How is interest on cash equivalents taxed?
As ordinary income
How is bond interest taxed?
Ordinary income
Treasury note timeframe
1-10 years
Treasury bond timeframe
longer than 10 years
STRIPS have coupon payments?
No - they’re zero coupon bonds
TIPS issued what maturities
5, 10, 30 year
How often 10 year TIPS issued?
twice a year
How often TIPS adjusted?
twice a year by inflation as measured by CPI
TIPS taxed how
interest and increases in principal due to CPI taxed as ordinary income
What changes on a TIPS what stays the same
Principal changes, rate stays the same
EE, HH and I bonds
non-marketable govt debt - redeemable at commercial banks - no taxable income reported until the bond is redeemed
Series EE bonds pay how
guaranteed fixed rate plus adjustment for inflation - variable rate adjusted every 6 months for inflation
How do you make money off Mortgage bonds
investor receives interest and principal - generate flow of payments but payment amount is uncertain - like if mortgage is refinanced - only the interest is taxable
Major problem with zero coupon bonds
IRS taxes annual interest as if it were received (accrued interest is taxed)
General obligation bonds
backed by credit and taxing power of issuing jurisdiction - belief municipality will be able to pay through taxation or revenue
Revenue bond
backed by revenues from a specific project - toll bridge, highway, stadium - payment subject to successful collection of revenue
Mortgage Bond
backed by specific property - usually real estate.
Debenture
unsecured - riskier than secured debt. subordinate debenture even riskier. subordinate debenture redeemed only after general debt
When would subordinate debenture be redeemed?
only after general debt
Investment grade rating
BBB or better - low risk
High yield rating
BB or lower - higher yields than investment grade
Convertible bond
bond can be converted to common stock. technically have fixed obligation and maturity but holders have the option to convert
Callable bond
can be retired prior to maturity
Foreign bonds
issued by and denominated in that country’s currency where its issued - US bond in UK denominated in Pounds
Bond Immunization
adjusting portfolio duration to match the investment time
horizon. minimizes investment rate risk
What is a strategy you could use to minimize interest rate risk on a bond portfolio?
Bond immunization
Bond coupon rate has what relationship to duration?
Inverse, lower the coupon higher duration
Think better business bureau for investment grade bonds
BBB or better
Which 2 series bonds are issued at face value?
HH and I
What is the interest on a series EE bond
90% of average 5-year T-Note
Which two govt bonds are tax deferred?
Series EE and Series I
Which two bonds are tax free for education expenses?
Series EE and Series I
Agency bonds interest higher or lower than gov’t bonds
higher
Some agencies that would issue bonds
The Federal National Mortgage Association (Fannie Mae)
The Federal Home Loan Mortgage Corporation (Freddie Mac)
The Federal Home Loan Banks
The Farm Credit Banks
The Student Loan Marketing Association (Sallie Mae)
Fannie Mae and Freddie Mac bonds taxable to what levels?
State and Federal
Other than Fannie Mae and Freddie Mac, how are agency bonds taxed?
Only pay federal tax, exempt from state and local
On a mortgage bond where you are receiving return of principal and interest, what is taxed?
Interest only
What is another name for a mortgage pass thru security?
Ginnie Mae or GNMA
When would a muni bond be subject to federal tax?
If there is a capital gain or loss on the bond. Diff between the sale price of the bond and the holder’s tax basis in the bond = amount of gain or loss.
How does OID effect taxes if you sell a muni bond?
increases tax basis for purposes of calculating gain/loss if you sell before maturity
OID on a muni bond, taxable or not?
OID is treated as tax-exempt for a municipal bond unless you sell it before maturity
Would you pay taxes on a market discount if you bought a muni in the secondary market?
Yes - Wif you buy a bond in the secondary market at a discount and sells it at a higher price or lets it mature, there is taxable capital gain
What type of muni bonds would be subject to Alternative Minimum tax?
Private activity muni bonds - any municipal bonds that are used to benefit or finance a private business
A muni bond subject to AMT tax would have a higher or lower yield?
Higher yield as the taxation makes it less attractive
Zero coupon treasury bonds taxed by who
federal gov’t
What is subject to tax on a zero coupon bond?
any annual appreciation in value, or undistributed interest - phantom income
Phantom Income
any annual appreciation in value, or undistributed interest on a zero coupon bond
Zero coupon treasury is taxed how vs zero coupon muni
Treasury is taxed federally muni is not subject to federal tax
Best account type to hold zero coupon bonds?
IRAs
TIPS are a good way to avoid what kind of risks
purchasing power and inflation
TIPS have a fixed coupon but you make more money progressively how
as the principal is adjusted higher for inflation, even though you have a fixed coupon, you’re making it off a higer principal
If deflation happens will you get less principal back on a TIPS?
no
