Investment

Question 1

Yankee Bond

Answer 1

Dollar denominted, issued in US BY foreign bank.

Question 2

Eurodollar

Answer 2

Depsot in any foreign bank dominated in dollars

Question 3

Corporation likely to call bonds

Answer 3

when bonds are selling at singificant premium. NOT always when rates go down.

Question 4

Nominal Yield = Coupon Rate

Answer 4

Stated rate of interest on the bond. The coupon rate***

Question 5

T Bills (100, issued at discount, no 9’s)

Question 6

T Bonds

Answer 6

1-2, issued at par callable

Question 7

Series EE

Answer 7

Subject to federal income tax
Non traded debt US government
Savings bonds… non marketable, non transferable, nonnegotiable, cannot pledge for collateral.
Issued at face value
Earn fixed interest rates - applies for 30 year life of each bond (20 years plus 10+ year extended maturity).
denominations as low as 50$.
rates for new issues adjust may 1 an November 1.
interest accrues monthly, compounded semi annually.
must be hard minimum 1 year.
Three month interest penalty held less than 5 years from issue date.
Treasury gauurentee’s doubling of money in 20 years.
EE interest is not subject to federal income TAX UNTIL the bonds are redeemed or reach final maturity.
Owner has the option of having the interest taxed each year.
Interest is not subject to state or local taxes.

** Both EE & I are tax free when redeemed if** owned by adult at least 24 (normally the parent) & CANNOT BE HELD IN UTMA/UGMA CUSTODIAN ACCOUNT AND QUALIFY FOR INTEREST EXCLUSION. AN UTMA/UGMA account is owned by the minor (not the custodian). A grandparent may claim the interest exclusion if grandchild/student is a dependent of the grandparent.

College funding EE: the taxpayer holding EE bonds may elect to have interest taxed annually as it accrues. currently with the Childs standard deception and 10% bracket…. tax will be minimal if they have the interest taxed to the child each year instead of themselves in the 37% bracket.

Question 8

Series HH

Answer 8

interest on HH bonds ARE subject to deferral tax. Not state and local.
No longer issued or traded.
HH bond interest is taxed annually.
Non Marketable
Were available only by exchanging at least $500 in Series EE bonds.
Interest paid semi-annually.
Non Marketable.
After 8/2004 EE’s are no longer exchangeable into HH bonds.

Question 9

Series I

Answer 9

I bond inflation adjustment subject to tax each year? … Owner DETERMINED. They rarely recognized tax in the current year.

• I’s are inflation adjusted while EE’s are fixed.
  I bonds are taxed like EE bonds.
  I bonds are inflation-indexed accrual securities of US government.
  Non marketable.
  Interest is added monthly to the and paid when holder cash the bond
  Sold issed at Face value - same as EE
  accumulate interest monthly.
  Interest is compounded every 6 months.
  UNLIKE EE’S… I’S HAVE NO GUARANTEED INTEREST RATE.
  Interest rate is composed of two parts. Fixed base rate and an inflation adjustment.
  fixed rate remains same for life.
  inflation adjustment update every 6 months to track CPI.
  *** If certain requirements are met… interest on I bonds redeemed for education expense is tax exempt. (SIMILAR TO EE BONDS).

Question 10

Mortgage Bonds

Answer 10

considered safest among long term corporate issues.
Mortgage bonds are backed by specific real property (land and building).
real property can be sold if the issuer defaults.

Question 11

CMO Z Tranche

Answer 11

Bears no coupon
Highest interest rate risk
higher yield than other tranches
longest duration
receives cash flow from collateral remaining after the other tranches are satisfied.

Question 12

Debeture

Answer 12

Corporate debt obligation
backed only by integrity of issuer

Question 13

Indenture

Answer 13

aka: Deed of trust
formal agreement between bond issuer & trustee.
contract also provides for the appointment of a trustee to act on behalf of the bondholders

Question 14

DRIP & RIP

Answer 14

DRIP: MUNI’S AND CORP’S

RIP: ALL GOVERNMENT BONDS EXCEPT ZERO’S*****

Question 15

(Calc) Intrinsic Value “Price” of Bond

Answer 15

Solving for PV***

2 P/YR

+1000 FV … par value
80/2 pmt … 8% coup
12, gold, xP/YR … 12 years matures
10 I/YR … comparable debt currently paying 8%
PV… 862.01

Question 16

(Calc) Bond Conversion Value

Answer 16

Bond: Par 1000
convertible (has conversion price at 40 per share)
market price stock 50

Post conversion value = …

1000 / 40 X 50 = 1250***

Question 17

STRIPs

Answer 17

do not distribute interest payments in the form of a coupon payment. STRIPS & Zero’s have No Coupon = least reinvestment rate risk.

the interest is accrued as phantom income

with an OID tax exempt obligation, the bonds interest could be either accreted or paid. it could be an OID coupon bond (not a pure zero). therefore interest may be paid out as well as accreted. All the other answers produce current interest.

TIP distributes current income.
OID tax exempt obligation distributes current income

Question 18

Coefficient of Variation

Answer 18

Which one os relatively more risky?

Question 19

Standard Deviation (Risks)

Answer 19

Variability or returns
Nondiversified Portfolio
Total Risk is the measure

Question 20

Beta (Risks)

Answer 20

Volatility of returns
In a Diversified Portfolio
Measure of Systematic Risk

Beta is a measure of the volatility of a particular securities (or portfolio) rate of return or price relative to the volatility of the market as a whole.

Question 20

GNMA

Answer 20

Reinvestment rate risk

Question 21

Zero Coupon Bonds

Answer 21

No interest coupon payments…

Therefore, elimination of reinvestment rate risk.

Zero’s still have Interest Rate Risk and Inflation Risk.