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SIE Exam > Individual Securities Debt > Flashcards

Individual Securities Debt Flashcards

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SIE Exam flashcards
1
Q

Par Value

A

Test will assume par value is 1,000

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2
Q

Maturity

A

Each bond has its own maturity date, when the investor receives the loan principal back.

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3
Q

Term Bond

A

principal of the whole issue matures at once. Its repaid all at once.

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4
Q

Serial Bond

A

Schedules portions of the principal

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5
Q

Balloon Bond

A

Issues schedules part of the bond principal before the final maturity date and pays off the major portion of the bond at maturity.

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6
Q

Savings Bonds

A

type of debt issued by the federal government that may be purchased and redeemed at banks or from the Treasury Department.

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7
Q

Coupon

A

interest rate the issuer agreed to pay the investor.

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8
Q

Coupon Rate/Stated Yield/ Nominal Yield

A

is the interest rate the bond pays (Coupon % x Par Value 1,000)

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9
Q

What happens if a bond trades between coupon payments?

A

The new buyer must pay the seller the amount of interest earned to date at the time of settlement, issuer will pay full coupon next payment cycle.

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10
Q

Bond Pricing

A

Premium to Par OR Discount to Par. Bond pricing is measure in points, with each point equaling 1% of face value or $10. (Price x 10)

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11
Q

Market forces affecting bond prices

A

Interest rate goes down, bond prices for those trading in the secondary market will go up (attractive to a buyer). Coupon stays the same.

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12
Q

Current Yield

A

Annual coupon payment DIVIDED BY Market Price

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13
Q

Yield to Maturity

A

Discount- the investor makes money at maturity.
Premium- the investor loses money at maturity.
“Basis of”

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14
Q

Basis =YTM

Example

A

Bond trading at a 5.83 basis that means that the bond has a YTM of 5.83%

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15
Q

Yield to Call

A

Callable bond is called in by the issuer, the investor receives the principal back sooner then anticipated (before maturity)

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16
Q

Bond Ratings

A

Where most investors consult for rating services

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17
Q

Three major credit rating agencies

A

Fitch Rating, Moody’s Investors Services, Standing and Poor’s Rating Services (S&P).
AAA (Highest, investment grade)- D (Lowest, noninvestment grade).
The higher the rating the lower the yield.

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18
Q

High-Yield Bond

A

Lower rated bonds carry a higher return. Higher the risk the high the return, sophisticated investors are suitable.

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19
Q

Nonrated

A

The rating organization rates those issues that either pay to be rated or have enough bonds outstanding to generate a constant investors interest.

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20
Q

Volatility in relation to Bonds

A

Movement in relation to interest rate.

  • The more time to Maturity, the more Volatile.
  • The higher the bond coupon rate, the lower the volatile it is.
  • Duration (combo of maturity and coupon rate) - The higher the duration means a more volatile price.
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21
Q

Bond Features - Call Feature

A

Call- Issuer. Allows issuers to call in the bond before maturity, this is done when the interest rate is falling.

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22
Q

Bond Features- Put Feature

A

Put- Bondholder. Allows investor to put the bond back to the issuers before it matures, this is done when the interest rate is rising (more of a return with a higher interest rate).

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23
Q

Bond Features- Convertible Feature

A

Convertible-Investor. Allows investors to convert a bond into shares of a common stock, exchange debt for ownership rights.

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24
Q

Zero Coupon Bonds

A

debt security that does not pay interest but instead trades at a deep discount, interest and principal is paid at maturity. More volatile. Investor may still need to pay income tax on the bond. STRIPS.

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25
Q

Secured Debt - Mortgage Bond

A

is secured by a mortgage that is typically backed by real estate holding or real estate property.

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26
Q

Secured Debt- Equipment Trust Certificates (ETC)

A

Particularly railroad and other transportation companies, finance the acquisitions of capital equipment used in their business. The title for the equipment is held in trust for the holders, so the obligation is to pay the investor is secured by the equipment.

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27
Q

Secured Debt- Collateral Trust Bond

A

No Real Estate or Equipment as collateral. Deposits securities it owns into a trust to serve as collateral for the lenders, this can also be securities issued by the corporation itself like stocks /bonds. The better the quality of the securities the better the quality of the certifications.

28
Q

Unsecured Debt-Debentures

A

Written promise or creditworthiness to pay the principal at its due date and interest on a regular basis.

29
Q

Unsecured- Guaranteed Bonds

A

Debt security that offers a secondary guarantee that the interest and principal payments will be made, should the issuer defaults due to bankruptcy, parent company.

30
Q

Unsecured- Income Bonds

A

Debt security in which only the face value of the bond is promised to be paid back to the investor. Coupons are paid only if the company has enough.

31
Q

Subordinate Debt

A

is debt that is repaid after senior debtors are repaid in full. It is above the Common Shareholders.

32
Q

Order of liquidations

A

When a corporation is unable to make payments to its creditors and vendors, it must declare bankruptcy. That’s when the court steps in to begin liquidating assets. The order of liquidation is then created to pay all creditors in order.

1) Secured debt holders- are paid with the assets sold
2) Unsecured debt and creditors-vendors and suppliers/Wages and taxes
3) Unsubordinated debt-Bonds have a higher coupon
4) Preferred Stockholders
5) Common stockholders- owners of the company. In a bankruptcy, rarely get any liquidation.

33
Q

Benefits of owning a debt securities

A

Income -Issuers must make interest payments

Safety- Higher priority then equity, much less price volatility then stocks.

34
Q

Risk of owning a debt security

A

Default- issuers will fail to make payments, that’s when credit rating is relied on. Treasury-backed securities are the safest investments for US investors.

Interest Rate Risk

Purchasing Power Risk (inflation, price of goods rising).

35
Q

Municipal Bonds

A

debt securities issued by the state or local government to finance its capital expenditures, like railroads, hospitals, sewer systems, and airports. Interest is tax free on federal and state level if investor lives in that state. Capital gains or trading profit is still being taxed.

36
Q

General Obligation Bonds (G.O)

A

Benefit the community but do not result in product revenue. Instead bonds issued by the state are backed by income tax, license fee, and sales taxes. Bonds issued by towns, cities, and counties are backed by property taxes , license fees, fines and ant others. **Voter Approval

37
Q

Revenue Bonds

A

used to finance facilities that generate sufficient income such as sewer, electric, public housing project, airports, bridges, tunnels, college dorms, student loan, hospitals, and stadium facilities) **NO Voter Approval

38
Q

Anticipation Notes

A

Short term securities issued to meet temporary financing needs with the expectation that future cash flows will repay the note.

39
Q

Tax Anticipation Note (TAN)

A

used in anticipation of future tax collections

40
Q

Revenue Anticipation Note (RAN)

A

offered periodically, used in anticipation of future revenue from revenue producing projects or facilities.

41
Q

Tax and Revenue Anticipation Note (TRAN)

A

used anticipation for both future tax collection and revenue from projects.

42
Q

Construction Loan Notes (CLN)

A

Construction of Housing Project

43
Q

Grant Anticipation Notes (GAN)

A

used in anticipation of receiving grant money from federal government.

44
Q

Corporate Bond Yield Question- Calculation

Tax Bracket & Current Yield

A

To determine the municipal bond tax bracket, investor must calculate the Tax Equivalent Yield. The higher the tax bracket, the greater the tax exemption value.

Tax Free Yield DIVIDED BY (100% MINUS the investors tax bracket)

45
Q

Equivalent Municipal Yield Question- Calculation

Tax Free Equivalent Formula

A

Corporate Yield TIMES (100% MINUS Investors Tax Bracket) =

46
Q

Treasury Bills (T-Bills)

A

short term debt obligations of the US government. One year or less. They are issued at a discount from par and redeemed AT par.
4 weeks, 13 weeks, 26 weeks and 52 weeks. Money Market.

47
Q

Treasury Notes (T-Notes)

A

debt obligation of the US Government. They pay semiannual interest as a percentage of the stated par value, and they mature at par value. Between 1-10 years.

48
Q

Treasury Bonds (T-Bonds)

A

debt obligation of the US Government. They pay semiannual interest as a percentage of the stated par value, mature at par value. Long term, greater then 10-30 years.

49
Q

Treasury Receipt

A

Zero Coupon Bond. Bond that is purchased at a discount by the investor in return for a payment of its full face value at its date of maturity. Issued by Brokerage-dealer.

50
Q

Treasury STRIPS

A

Zero Coupon Bond. U.S. bonds that are sold at a discount to their face value and pay full face value at their maturity. US Treasury

51
Q

Treasury Inflation Protected Securities (TIPS)

A

Fixed coupon rate and pay interest every six months. Principal value is adjusted based of inflation rate.
Interest payment Increase with the principal during inflation and decrease during deflation. Will never be less then $1,000 par. US Treasury

52
Q

Farm Credit System (FCS)

A

Nationwide lending network which specializes in serving the agricultural community, government sponsored.

53
Q

Government National Mortgage Association (GNMA, or Ginnie Mae)

A

Government owned corporation that supports Department of Housing and Urban Development. Sold based on life expectancy because the issues are backed by mortgages. Affordable home loan for underserved consumers, low income borrowers and first time home makers. Pay monthly income*

54
Q

Federal Home Loan Mortgage Corporation ( FHLMC, Freddie Mac)

A

The role of Freddie Mac is to buy a large number of loans from mortgage lenders, then combine them and sell them as mortgage-backed securities. GSE

55
Q

Federal National Mortgage Association (FNMA- Fannie Mae)

A

Its purpose is to help moderate to low-income borrowers obtain financing for a home. Increasing mortgage loan lending. GSE.

56
Q

Capital Market

A

Intermediate to Long term financing, Debt or Equity securities with maturity of more than one year.

57
Q

Money Market

A

Short term funds to corporation, banks, US federal government. Maturity less then one year. Issue discount at face value.

58
Q

Certificate of Deposit (CD)

A

Deposit money for a certain amount of time and earn interest. At maturity (Less then a year) investor can withdraw the money with interest earned or re invest for another set of time. MONEY MARKET

59
Q

Bankers Acceptance (BA)

A

short term, post-dated check or credit line. BA assurance to the seller that he will be paid for the good he sells to a purchaser. MONEY MARKET

60
Q

Commercial Paper

A

unsecured short term. company will sell commercial paper to pay for accounts payable or inventories. Matures in 1-270 days. ONLY for companies with excellent credit. MONEY MARKET

61
Q

Repurchase Agreement (REPOs)

A

buyer and a seller to conduct a transaction and then reserve the transaction in the future. Contract would included a repurchase price (higher price) and maturity date. Used by banks.

62
Q

Federal Funds Loans

A

Federal Reserve Board mandates how much money its members banks must have on reserve. These can be loaned from one bank to another to meet their reserve requirement. Short Term- sometimes overnight. Money Market.

63
Q

Why would you place a money market securities in a client portfolio?

A

High liquid, very safe, a good place to invest money that will be needed soon (short term). Rate of return is low

64
Q

Collateralized Mortgage Obligations (CMO)

A

Pool of mortgages organized by maturity and risk. CMO will receive homeowner mortgage payment and then passes them to investors in the CMO. Fannie Mae and Freddie Mae.

65
Q

Tranches

A

A pool of mortgages is structured into maturity classes. Years 1-3 least risk, Years 12-15 higher risk.

66
Q

Collateralized Debt Obligation (CDO)

A

Structured financial product backed by a pool of loans, mortgages, auto loan or credit loans.

SIE Exam (4 decks)

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