Fixed Income Flashcards
During a period where the yield curve is flat…
short term rates are more volatile than long term rates
Any bond selling at a premium will yield…
less than the coupon or nominal yield
Treasury securities are subject to…
interest rate risk
If a customer’s chief concern is to shelter as much portfolio earnings from tax as possible, which of the following would be most suitable?
A. Money Market Instruments
B. Municipal GOs
C. High-Yield Bonds
D. Treasury Receipts
B. Municipal GOs
Interest is exempt from federal tax & perhaps state income tax depending on the investor’s residency
When the market IR is 8%, which of the following equally-rated bonds will have the potential for the greatest relative price volatility to changes in IR?
A. 12% Coupon; 6 years to maturity
B. 8% Coupon; 12 years to maturity
C. 12% Coupon; 12 years to maturity
D. 8% Coupon; 6 years to maturity
B. 8% Coupon; 12 years to maturity
the bond with the lowest coupon & longest maturity is subject to the greatest price volatility
In general, one would prefer to purchase a bond when its current market price is…
less than it’s present value
Current IRS regulations permit an unlimited contribution to which tax-deferred plans?
Annuities
Double Barreled Bond
is backed by a specific source of revenue as well as the full faith & credit of the issuer with ad valorem taxing power
The coupon/nominal yield is…
the rate stated on the face of the bond that never changes
Funds obtained from a policy loan are not considered taxable income, but if the amount received at policy surrender is greater than the cost basis, the excess is taxed as…
ordinary income
When a bonds IRR equals the required rate of return (the discount rate), the NPV of that bond…
is zero
A client has been contributing to a periodic payment annuity for 20 years. The mortality & expense (M&E) is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68?
it ceases
Money Market Instruments
High quality debt instruments that will mature in 1 year or less
- CDs
- Treasury Bills
- Commercial paper
- Repurchase agreements
3 qualities of universal life insurance
- may include a minimum guaranteed IR
- offers the policy owner exceptional flexibility in adjusting the premiums, cash value & death benefit
- there are 2 death benefit options
When a bond’s coupon yield is lower than its current yield, that is an indication that the bond…
is selling at a discount
tax-equivalent yield of a municipal bond equals…
tax-free yield / 100% - tax rate
When the length of time to maturity is relatively close, the bond with the lowest coupon rate will…
have the longest duration
A discount corporate bond that is callable would be quoted on a yield basis upon…
yield to maturity
The principal of TIPS is adjusted every _ months for inflation rate
6
In almost all circumstances, term life will be the…
least expensive form of insurance
Interest on foreign bonds in taxed in the US by…
federal, state, & local governments
Preferred stockholders have a preference as to…
- liquidation
- distribution of dividends
Municipal bonds are not an appropriate investment for…
any tax deferred vehicle
CDs are…
interest-bearing debt instruments issued by banks at their face value
Bonds with the highest coupons have the shortest duration, therefore are…
the least subject to IR risk
When all the coupons are the same, the bond with the longest maturity will have the longest ________, & therefore will be subject to the greatest price fluctuations
duration
An investor purchases a single premium deferred annuity with an initial premium of $200,000. Soon after the purchase, the investor receives a statement showing an initial balance of $210,000. This is most likely due to…
a bonus annuity
Zero coupon bonds always sell at..
a discount
US Treasury Securities, generally the T-Bill, is referred to as…
the risk free rate
When a US resident investor purchases foreign bonds…
appreciation of both the bond & the foreign currency benefits the domestic investor
A bond is paying $100/year in annual interest & is selling at par. If the discount rate is 10%, the NPV is…
zero
The YTM of a bond represents the bonds…
Internal Rate of Return (IRR)
the total return earned on a bond that is held to maturity
On a taxable zero-coupon bond, the annual imputed interest is…
reported annually for tax purposes as phantom income
Subordinated Debt
debt that is repaid after senior debtors are repaid in full
- riskier than unsubordinated debt, is listed as a long term liability after unsubordinated debt on the balance sheet
Treasury bills are issued…
- in book entry form
- at a discount
As duration increases, so does…
price volatility
Treasury Notes (T-Notes)
issued with maturity dates of 2-10 years
Mr. Beale buys 10M 6.6s of 10 at 67. What will his annual interest be?
Interpret “10M” as “$10,000 worth of.”
Beale receives the nominal yield of the bonds, which is 6.6% of $10,000.
The M is from the roman numeral for 1,000.
ANSWER: $660
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is
a municipal bond fund
Municipal bonds are considered second only to U.S. government securities in terms of safety. Also, interest received from the bonds is generally exempt from federal income tax.
Yankee bonds…
are issued by non-U.S. entities in marketplaces inside the United States.
The bonds are issued in U.S. dollars meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.
