Investments Flashcards
Brokered CDs vs. CDs
Extra word = Extra Risk.
Brokered CDs are issued by a commercial bank, but traded through a brokerage firm instead of issued directly. Since they’re negotiable, they have interest rate risk.
OID Bonds
Mostly Zero Coupons. Stands for Original Issue Discount.
Most have “Phantom Income” through Accretion each year.
OID Taxation, for Tax Exempt
Tax exempt accretion, UNLESS bought / sold on the secondary market. Any appreciation over and above the adjusted bond’s value becomes taxable.
Tax free if held to maturity (at least at the federal level, states sometimes)
Money Market Deposit Accounts vs. Money Market Funds
MMDAs are issues by commercial banks, and insured by FDIC (six transfers per month allowed)
MMFs are NOT insured (for exam purposes). Average maturity limited to 90 days. Can be taxable or tax exempt.
Commercial Paper
100K Denominations start. Issued by large companies, maturity 270 or less. Sold at a discount
Bankers’ Acceptance
Used for import / export. 9 months or less, sold at discount.
Yankees vs. Eurodollars
Eurodollar is deposit in any Foreign bank denominated in dollars
Yankee bonds are dollar-denominated bonds issued in the US by foreign banks and corporations.
T bills, notes, and bonds
Bills are < 1 year (quoted in terms of discounted yield) - $100 - $1,000,000 denomination
Notes are 1-10 years - $1,000 to $100,000
Bonds are 10-30 - $1K - $1MM
NO STATE OR LOCAL TAXES
Where should we put zeroes? (STRIPS, CATS, TIGRS)
TAX DEFERRED. Phantom income.
STRIPS - Direct treasury obligation
CATS, TIGRS - Brokerage obligation (made of treasuries)
Phantom Income impact on Basis
TIPS too. Basis is increased by phantom accretion (and even the inflation adjustment)
EE Bond Taxation
Tax deferred, not state or local.
Parents must own them to qualify for education tax treatment (under AGI limits)
HH Bonds
NO more EE exchanges allowed
Pay interest semi-annually, by check. Can continue to defer EE bond appreciation until sale of HH bonds with exchange.
I Bonds
Same as EE, except without guaranteed interest rate.
Base fixed, plus 6 month inflation adjustment.
GNMA vs. FNMA/FHLMC
G = Guaranteed F = Fleeced!
Municipal Bond Insurers
Assured Guaranty and Berkshire
Investment Grade Cutoff for Bonds
BB = Bad Bonds BBB = Better Bad Bonds (investment grade)
Coupon for a Z Tranche MBS
ZERO coupons. Collateral remaining.
Corporate and Muni Bond Risks
DRIP
Government Bonds
RIP
Intrinsic Value of a Convertible
Higher of:
1. “Conversion Value”.
(Par / Conversion Price) * Current Stock Price
- Bond Value
Using Face as FV, and market interest rate, figure out PV of the bond (to maturity).
Increase in comparable bond yields will drive the value down.
With Put bonds, when would the holder exercise the option?
If interest rates rise, driving the bond price down, you would exercise the put (at par), and reinvest at a higher interest rate. For this privelidge, coupon is a bit lower.
If interest rates go down, the issues wins.
Callable bonds issued at a higher or lower coupon rate than similar bonds without the priveldge?
Callable bonds are less attractive, higher coupon rates.
Price fluctuation of Preferred Stock vs. Bonds
Duration is basically infinite, with no maturity. Fluctuations often are greater than even LT bonds.
Do C corporations deduct bond interest and preferred stock dividends?
Yes to bond interest, NO to preferred dividends.
Corporations that own preferred stock, can exclude dividends partially (50%) from their income.
