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Investments CFP > Fixed income > Flashcards

Fixed income Flashcards

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CFP® flashcards
1
Q

Money market funds

A

specialized investment cos make short term investments in money market instruments - cash and equivalents

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2
Q

T Bill timeframe

A

3-12 months

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3
Q

How are T Bills sold

A

discount to face value, 10k to 1mil denominations

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4
Q

Commercial Paper

A

unsecured short term promissory note issued by highly creditworthy corps - very short term bonds - component of money market funds

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5
Q

Bankers acceptance

A

short term promissory note guaranteed by a bank

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6
Q

Eurodollars

A

US Dollars deposited in foreign banks as cash or CDs

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7
Q

How is interest on cash equivalents taxed?

A

As ordinary income

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8
Q

How is bond interest taxed?

A

Ordinary income

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9
Q

Treasury note timeframe

A

1-10 years

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10
Q

Treasury bond timeframe

A

longer than 10 years

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11
Q

STRIPS have coupon payments?

A

No - they’re zero coupon bonds

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12
Q

TIPS issued what maturities

A

5, 10, 30 year

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13
Q

How often 10 year TIPS issued?

A

twice a year

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14
Q

How often TIPS adjusted?

A

twice a year by inflation as measured by CPI

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15
Q

TIPS taxed how

A

interest and increases in principal due to CPI taxed as ordinary income

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16
Q

What changes on a TIPS what stays the same

A

Principal changes, rate stays the same

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16
Q

EE, HH and I bonds

A

non-marketable govt debt - redeemable at commercial banks - no taxable income reported until the bond is redeemed

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17
Q

Series EE bonds pay how

A

guaranteed fixed rate plus adjustment for inflation - variable rate adjusted every 6 months for inflation

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18
Q

How do you make money off Mortgage bonds

A

investor receives interest and principal - generate flow of payments but payment amount is uncertain - like if mortgage is refinanced - only the interest is taxable

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19
Q

Major problem with zero coupon bonds

A

IRS taxes annual interest as if it were received (accrued interest is taxed)

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20
Q

General obligation bonds

A

backed by credit and taxing power of issuing jurisdiction - belief municipality will be able to pay through taxation or revenue

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21
Q

Revenue bond

A

backed by revenues from a specific project - toll bridge, highway, stadium - payment subject to successful collection of revenue

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22
Q

Mortgage Bond

A

backed by specific property - usually real estate.

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23
Q

Debenture

A

unsecured - riskier than secured debt. subordinate debenture even riskier. subordinate debenture redeemed only after general debt

24
Q

When would subordinate debenture be redeemed?

A

only after general debt

25
Q

Investment grade rating

A

BBB or better - low risk

26
Q

High yield rating

A

BB or lower - higher yields than investment grade

27
Q

Convertible bond

A

bond can be converted to common stock. technically have fixed obligation and maturity but holders have the option to convert

28
Q

Callable bond

A

can be retired prior to maturity

29
Q

Foreign bonds

A

issued by and denominated in that country’s currency where its issued - US bond in UK denominated in Pounds

30
Q

Bond Immunization

A

adjusting portfolio duration to match the investment time
horizon. minimizes investment rate risk

31
Q

What is a strategy you could use to minimize interest rate risk on a bond portfolio?

A

Bond immunization

32
Q

Bond coupon rate has what relationship to duration?

A

Inverse, lower the coupon higher duration

33
Q

Think better business bureau for investment grade bonds

A

BBB or better

34
Q

Which 2 series bonds are issued at face value?

A

HH and I

35
Q

What is the interest on a series EE bond

A

90% of average 5-year T-Note

36
Q

Which two govt bonds are tax deferred?

A

Series EE and Series I

37
Q

Which two bonds are tax free for education expenses?

A

Series EE and Series I

38
Q

Agency bonds interest higher or lower than gov’t bonds

A

higher

39
Q

Some agencies that would issue bonds

A

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)

39
Q

Fannie Mae and Freddie Mac bonds taxable to what levels?

A

State and Federal

40
Q

Other than Fannie Mae and Freddie Mac, how are agency bonds taxed?

A

Only pay federal tax, exempt from state and local

41
Q

On a mortgage bond where you are receiving return of principal and interest, what is taxed?

A

Interest only

42
Q

What is another name for a mortgage pass thru security?

A

Ginnie Mae or GNMA

43
Q

When would a muni bond be subject to federal tax?

A

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.

44
Q

How does OID effect taxes if you sell a muni bond?

A

increases tax basis for purposes of calculating gain/loss if you sell before maturity

45
Q

OID on a muni bond, taxable or not?

A

OID is treated as tax-exempt for a municipal bond unless you sell it before maturity

46
Q

Would you pay taxes on a market discount if you bought a muni in the secondary market?

A

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

47
Q

What type of muni bonds would be subject to Alternative Minimum tax?

A

Private activity muni bonds - any municipal bonds that are used to benefit or finance a private business

48
Q

A muni bond subject to AMT tax would have a higher or lower yield?

A

Higher yield as the taxation makes it less attractive

49
Q

Zero coupon treasury bonds taxed by who

A

federal gov’t

50
Q

What is subject to tax on a zero coupon bond?

A

any annual appreciation in value, or undistributed interest - phantom income

51
Q

Phantom Income

A

any annual appreciation in value, or undistributed interest on a zero coupon bond

52
Q

Zero coupon treasury is taxed how vs zero coupon muni

A

Treasury is taxed federally muni is not subject to federal tax

53
Q

Best account type to hold zero coupon bonds?

A

IRAs

53
Q

TIPS are a good way to avoid what kind of risks

A

purchasing power and inflation

54
Q

TIPS have a fixed coupon but you make more money progressively how

A

as the principal is adjusted higher for inflation, even though you have a fixed coupon, you’re making it off a higer principal

55
Q

If deflation happens will you get less principal back on a TIPS?

A

no

Investments CFP (14 decks)

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