Investment Vehicles - Fixed Income Flashcards
CD’s
Covered by FDIC 250,000 per titling (indiv, Jt, trust)
Trust - Revocable
$250,000 per bene
benes must be:
1. qualified family member (spouse, child, parent,
sibling, grandchild)
2.must be specifically named
3. must have intention of passing account to bene
at death
IRA - separate from individual registration
Self directed Keogh, 457, Self Directed DC aggregated.
Negotiable CD
marketable (dealer makes market) traded on open market Interest Rate Risk low default risk high liquidity Large institutional Investors Insured up to $250 by FDIC
Non-Negotiable CD
3mo-5yrs Low default risk Highly Liquid No marketability Good for laddering
Taxation CD’s
Interest Income - Ordinary rates
Early Withdrawal penalty non negotiable
Negotiable- taxed similar to T-Bills
Money Market Deposit Account
Offered by Banks Non-negotiable Non-transferable FDIC insured Six transfers per mo (3 by check) Interest taxed in yr earned - Ordinary rates
Money Market Funds
Open end investment company
NOT insured
taxable or tax exempt
Average maturity of investments 90 days
Treasury bills
Maturities 1yr or less (3,6,12)
Issued at discount from face
$100-$1,000,000
Weekly Auctions
No Risk
Safest investment
Subject to federal tax
Exempt state and local tax
Commercial paper
Short term loans between corporations Unsecured promissory note (default risk) Issued by well know strong financially stable Co's Start at $100k Maturity 270 days or less Sold at a discount Not registered with SEC
Bankers Acceptance
Used to finance imports and exports Serves as assurance of payment (like line of credit) Negotiable Can be held or traded Maturity 9mo or less Trades at a discount to face Held to maturity or traded
Eurodollars
Deposit in ANY foreign bank denominated in US dollars
In millions
Maturity under 6 months
Yankee Bonds
Dollar denominated bonds issued in US by foreign banks and companies
Registered with the SEC
Issued when US markets more favorable
Individual Bonds Yields
Discount Bonds Yield to Call Yield to maturity Current Yield Nominal Yield (Coupon)
Premium Bonds Nominal Yield (Coupon) Current Yield Yield to Maturity Yield to Call
Bonds are likely to be called when selling at a premium
Accrued Interest
Interest is earned daily.
Purchaser of bond must compensate seller for accrued interest
Calculated last interest payment to regular way settlement
1099-INT Semi annual interest- accrued interest =taxable interest
Basis cost - accrued interest
Original Issue Discount - OID
Discount from Par at time issued
commonly zero coupon bonds (no accretion)
Discount is accreted over bonds life if more than 1yr
accreted portion included in taxable interest for the year
Reported as interest income
No reinvestment risk
Treasury Notes
1-10 year maturities
$1,000-$100,000
Issued at Par
RIP RISK (Reinvestment, Interest rate, Purchasing power)
Non-callable Semiannual interest Monthly Auctions Subject to Federal Tax Exempt State and local tax
Uses High Quality can be used as collateral certainty of income required marketable investment diversification
Treasury Bonds
10-30 Years
$1,000-$1,000,000
Issued at Par
RIP RISK (Reinvestment, Interest rate, Purchasing power)
Callable -15 years prior to maturity Semiannual interest Monthly Auctions Subject to Federal Tax Exempt State and local tax
Uses High Quality can be used as collateral certainty of income required marketable investment diversification
STRIPS
Separate Trading of Registered Interest and Principal of Securities
Treasury zero coupon bonds
Only through financial institutions Not Obligation of Gov
Interest income reported in yr earned
Income reported even though not received until maturity
Tax Treatment TIPS
Taxed annually on interest and appreciation
Federal tax only
Ordinary Income Rate ( appreciation is phantom income)
Loss in bond value gets deducted from interest first and if left over becomes an ordinary deduction. (Notes and Bonds taxed at sale as gain or loss)
Basis is Principle value +/- inflation adjustment
TIPS
Marketable security whose principal is adjusted by CPI
Obligation of Federal Government
5, 10, 30 year
Denominations of $1000
Interest rate is fixed
Interest payments vary based on changes in principal value
Inflation adjusted principal(principal X SEMIANNUAL inflation rate) X 1/2 interest rate
redeemed at inflation adjusted principal or original principal.
Protects against Purchasing Power Risk
EE Bonds
Backed by Gov non marketable non negotiable non transferable Sold 50% face can't be pledged as collateral fixed rate of interest 30yr life of bond $25-$10000 Held min or 1 year (3mo penalty if held less than 5 years) Value double 20 years Interest based on 10 yr treasury note
Owned by adult unless in UTMA(loses interest exclusion though)
Interest not subject to state and local taxes
can have interest taxed each yr or at redemption
I Bonds
Inflation indexed savings vehicle
fixed rate of return and semi-annual inflation rate
based on CPI
Taxed same as EE
Mortgage Backed Securities
Ownership in a pool of mortgages
GNMA, FHA, VA, FNMA, FHLMC, FFCB, FHLB, TVA
$25k
GNMA risk
Interest rate risk
reinvestment risk (prepayment of mortgage)
Others have some default risk….low
Each payment represents interest and return of principal
Implicitly backed
GNMA directly backed
Rates go up, people may pay mortgage sooner
GO Muni Bonds
backed by taxing power of issuer
bond holders have right to compel tax levy to keep bond from default
safest muni type bond
Issued to finance capital improvements
Revenue Muni Bonds
Issued to finance specific projects (airport, hospital, tollway..)
Repaid from revenue generated
credit risk
risker = higher yields
Taxation Muni Bonds
Federal tax free
State tax free for residents of issuing state
Cap gain or loss if sold other than basis
TEY = coupon/ 1-tax rate
Mortgage Bonds
Safest among long-term corporate issues
backed by real property
can be sold if issuer defaults
CMO
Collaterlized Mortgage Obligations
mortgage payments looked at on a cash flow basis
Based on expected cash flow over life of the pool
multi class pass through securities
A-Z tranches = fast, medium and slow pay
Private Activity Bonds
Used to fun private Activities - like stadiums
Muni Bond insurance co
American Municipal Bond Assurance AMBAC
Municipal Bond Insurance Association Corp. MBIA
Bond Risk
Credit Risk - defined by rating
DRIP
Default, reinvestment, interest rate, purchasing power
Gov Bonds RIP! No default or credit risk
High yield BB or lower
Bond Duration
measures a bonds price sensitivity to changes in interest rates
Bigger duration = more sensitive = more volatile to interest rate changes
Duration is the moment in time that an investor is immune to interest rate risk and reinvestment risk
Weighted average of time until investor receives all
Convertible Bonds
May convert bond to shares of common stock
Pay interest
Market price depends on value of stock and interest paid
(Price)Intrinsic value Convertible Bonds (Investment value)
(Price)Intrinsic value - PV of expected cash flows
FV +face amount ($1000) PMT= coupon 2 divide (7%= $70/2) N= Yrs to maturity X 2 I= Comparable bond 8% 8 (2 divide) PV = solve for
If conversion value is less than investment value-bond may be paying more than alternative bonds
Bond Conversion - Convertible Bonds
Value of bond if converted at current market conditions
Conversion Value = (PAR/Conversion Price)Current Market Price of Stock
*be careful…par maybe other than $1000
