Investment Vehicles

Question 1

Commercial Paper

Answer 1

unsecured promissory note issued by large company starting at $100k with maturity of less than 270 days

Question 2

T Bill

Answer 2

maturity of 3, 6, or 12 months, listed at a discount to face value, no coupon interest, safest benchmark for risk free rate of return, auction weekly

Question 3

Banker’s Acceptance

Answer 3

Finance imports and exports, maturity 9 months or less, trades at a discount to face value

Question 4

Eurodollar

Answer 4

Deposit at ANY foreign bank listed in US dollars

Question 5

Yankee Bonds

Answer 5

US dollar denominated bonds issued in US by foreign banks or corporations

Question 6

Treasury Notes

Answer 6

maturity 1-10 years, RIP risk, not callable, interest paid semi-annually, auction monthly

Question 7

Treasury Bonds

Answer 7

maturity 10-30 years, RIP risk, if callable not for at least 15 years from first day, interest paid semi-annually, auction quarterly

Question 8

Treasury STRIPS

Answer 8

zero-coupon bonds, direct obligation of the federal government, discount treated as taxable income, earned annually

Question 9

TIPS

Answer 9

marketable, face value is adjusted semi-annually to keep pace with CPI over a 6 month period, taxation on interest plus appreciation in face value annually

Question 10

EE Bonds

Answer 10

non marketable, non transferable, nonnegotiable, cannot be pledged as collateral, issued at face value, 30 yr maturity, must be held a minimum of one year, 3 month interest penalty applied to bonds held less than 5 years, guaranteed to double after 20 years, if it does not, Treasure will make one time adjustment, interest taxed at maturity unless owner chooses otherwise, only taxed at Federal level.

Question 11

HH Bonds

Answer 11

Available by exchanging EE Bonds before 2004, pay interest semi-annually by check, non marketable.

Question 12

I Bonds

Answer 12

inflation-indexed, non marketable, nontransferable, nonnegotiable, cannot be used as collateral, sold at face value, interest is based on fixed rate plus inflation adjustment updated every 6 months, can be redeemable tax free if used for qualified education expense

Question 13

GNMA

Answer 13

• direct guarantee of US Government
• No Default Risk
• pass through certificate representing individual interests in pooled mortgages of FHA, VA, and Farmer’s home loans

Question 14

GO Bonds

Answer 14

• have the right to compel a tax levy to make a payment on debt
• considered safest type of municipal security

Question 15

Revenue Bonds

Answer 15

• backed by a specific source of revenue only
• typically higher yields due to increased risk

Question 16

Insurers of Municipal Bonds

Answer 16

• AMBAC: American Municipal Bond Assurance Corp
• MBIA/National: Municipal Bond Insurance Association Corp/National
• BAM: Build America Mutual Insurance

Question 17

Mortgage Bonds

Answer 17

considered safest corporate bond due to real estate collateral

Question 18

CMO

Answer 18

• Collateralized Mortgage Obligations
• Arranged in Tranches for cash flow purposes
• Payment are interest and return of principal

Question 19

Debenture

Answer 19

Corporate Debt only backed by integrity of issuer

Question 20

DRIP

Answer 20

• Default Risk
• Reinvestment Risk
• Interest Rate Risk
• Purchasing Power

Question 21

High Yield Corporate Bond

Answer 21

• rating of BB or lower
• called a junk bond

Question 22

Convertible Bond

Answer 22

• hybrid debt security
• may be converted into specific number of shares of issuer’s common stock

Question 23

Bond Conversion Value

Answer 23

CV=(PAR/CP) P_s

CP = Conversion Price

P_s = Current market price of underlying stock

PAR = Par Value of Bond (presume $1000 if not stated)

Question 24

Put Bond

Answer 24

permits owner to sell the instrument back to issuer at par