Investments Ch 1 Flashcards
Issued in exchange for a deposit of funds by most American banks. Deposit maintained in bank until maturity, at which time the holder receives the deposit plus interest. Negotiable in that they can be sold in the open market before maturity. Carry interest rate risk.
Negotiable Certificates of Deposit (CDs)
Open-end investment companies offer Money Market _________. Not insured.
Mutual Funds
Financial Institutions offer Money Market _____________.
Deposit Accounts
Short-term securities with maturities of one year or less. Issued at a discount from face value.
Treasury bills
Short-term, unsecured promissory note issued by large, well-known, and financially strong companies. Denominations start at $100k. Maturity is 270 days or less. Normally sold at a discount and rated by a rating service as to quality.
Commercial paper
________________ include commercial paper (default is possible) and are not insured.
Money market funds
Because they are issued by the US Treasury, treasury securities carry ________________.
No credit/default risk
____________ hold municipal debt (default is possible) and are not insured. Slightly more risk than MMFs.
Tax-exempt money market accounts
Used to finance imports and export transactions. Bearer securities and can be held to maturity. Maturity is 9 months or less. Trades at a discount to face value.
Banker’s acceptance.
A deposit in any foreign bank that is denominated in dollars.
Eurodollar
Dollar-denominated bonds issued in the US by foreign banks and corporations when market conditions are more favorable than on the Eurobond market or in domestic markets overseas.
Yankee Bonds
Yankee Bonds must be registered with the SEC like other bonds sold to the public in the United States.
A debt security which obligates the issuer to pay interest (usually semiannually) and to repay the principal amount when the debt matures at the end of its term.
Bond
Bonds are issued with a stated ________________ (usually $1,000) and a stated ______________.
par value / rate of interest (coupon rate, nominal rate)
A bond sells at a _________ when its par value is higher than its purchase price.
Discount
A bond “point” is worth _______.
$10
A bond sells at a _______________ when the bond’s purchase price is higher than par value.
Premium
Stated rate of interest on the bond
Nominal yield / Coupon rate
For test purposes, all bond trades are assumed to be _______
“with accrued” or “plus accrued”
Referring to interest
An Original Issue Discount is discounted from _____________ when it is issued.
par value
A zero-coupon bond owner must report interest income although the bond pays no interest before maturity. This is an example of _________________.
Phantom income
___________ is performed on a compound interest basis. It generates phntom income but enables the bondholder to raise the basis accordingly.
Accretion
Has maturities of 3, 6, and 12 months.
T-bills
Issued in denominations of $100 to $1,000,000.
T-bills
The benchmark for “risk free rate of return”
T-bills
In terms of auction, T-bills auction _______, Treasury notes _______, Treasury bonds _______.
weekly / monthly / quarterly
T-bills, Treasury notes and Treasury bonds are subject to _____________ tax and exempt from________________ tax.
Federal income / state and local income
The risks to which treasury notes and bonds are subject.
Reinvestment
Interest rate
Purchasing power
The Treasury issues its own zero-coupon bonds called _________.
STRIPS
Separate
Trading of
Registered
Interest and
Principal of
Securities
Investors who purchase STRIPS acquire a ______________ of the federal government.
direct obligation
Offer protection against inflation. Marketable. Adjusted semi-annually to keep pace with inflation as measured by the CPI over a 6-month period. Sold in $1000 denominations.
TIPS
Treasury
Inflation -
Protection
Securities
Although TIPS are issued with a stated coupon rate that is low compared to conventional Treasuries, the amount of the semi-annual interest payment _____ as the face value is adjusted ______ for inflation.
rises / upward
With TIPS, the investor is taxes annually on the ________ plus the __________.
interest payment / appreciation in face value.
With TIPS, the interest rate is _____, and the interest payments will ____ depending on inflation related adjustments to principal.
fixed / vary
For series EE savings bonds denominations are as low as _____.
$50
The nontraded debt of the US government, _____ are non-marketable, nontransferable, nonnegotiable, and cannot be pledged for collateral.
Series EE bonds issued after 2005
Series EE bonds are issued at ______ and earn _____ interest rates
Face value/fixed
The fixed rate applies for the 30 year life of each bond, which is 20 years, but also adds a 10 year extended maturity.
For series EE, savings bonds, interest accrues ______  and is compounded _______.
Monthly / semiannually
Series EE bonds must be held for a minimum of _______.
One year.
There is a three month interest penalty applied to bonds, held less than five years from the issue date
At a minimum, the treasury guarantees the series EE bonds value will ______ after 20 years, and it will continue to earn the fixed rate set at the time of issue, unless a new rate or rate structure is announced.
Double
If the bond does not double value in 20 years, the treasury will make a one time adjustment and maturity to make up the difference. Interest will be based on current 10 year treasury note yields.
_____ our inflation, indexed accrual securities of the US government, and they are non-marketable, non-transferable, nonnegotiable, and cannot be pledged for collateral.
I bonds
I bonds are sold at ______. The interest accumulates ______. Interest is compounded every ______. They are issued in the same denominations as EE bonds, but have no _______.
Face value/monthly/6 months/guaranteed interest-rate.
True or false
EEs and I bonds are backed by the full faith and credit of the United States.
True
true or false
EEs may qualify for tax benefits upon redemption when used for qualified, education, expenses; eye bonds cannot be used for qualified education expenses.
False. Tax-free redemptions of both EE and I bonds can be used for qualified college education expenses.
The inflation adjusted interest on I bonds accrues until the bond ______.
Mature or is redeemed
Newly issued EE bonds, pay a fixed rate of interest for up to _______ and are no longer exchangeable into _____.
30 years/HH bonds
GNMAS are a ________of the US government.
Direct guarantee
_______ buys FHA, VA, and Farmer, home administration, insured mortgages from banks and places them into mortgage pools it then issues, pass-through certificates, representing individual interest in the pool.
GNMA
Because they are not issued by the treasury, GNMA interest is _______ at federal, state and local levels.
Taxable
The minimum size of an individual GNMA certificate sold to an individual investor is ______.
25,000
Each GNMA payment received represents both _____ and ______ .
Interest and return of principal
(no par at maturity)
______ issued by states, cities, counties, and other non-federal governmental units in order to raise capital.
Municipal securities
Backed by the full faith, credit, and taxing power of the issuing municipality. The issuer promises, if necessary, to raise taxes without limit in order to pay off the bond holders.
General obligation bonds
_____ bonds are generally considered the safest type of municipal credit.
General obligation
Backed by a specific source of revenue, to which the full faith and credit of the issue is not pledged.
Revenue bonds
Because revenue bonds are backed by a single source of funds, they present greater credit risk than GO bonds and trade at higher yields.
Consider the safest among long-term corporate issues, _______ are backed by specific real property, owned by the issuing corporation.
Mortgage bonds
The ___ tranche of a collateralized mortgage obligation, receives interest in principal only after all other tranches have been liquidated. Since it has the longest duration, it will have the highest interest rate risk. Because it is the last class to be paid it receives a higher yield than the other classes.
Z
Examples of _______ include GNMA, Fannie Mae, and Freddie Mac securities.
Mortgage-backed certificates
A corporate debt obligation backed only by the integrity of the issuer.
Debenture
A formal agreement, also called a deed of trust, between an issue of bonds, and the trustee. Also provides for the appointment of a trustee to act on behalf of the bond holders. The agreement covers form of bond, amount of the issue, property, pledged, protective, covenant, working capital and current ratio, redemption, rights, or call, put, or conversion provisions.
Indenture
Risks of corporate and municipal bonds are the following:
A creditor Macy’s the collateral and sell it to recoup the principal
As payments are received from the investment, interest rates have fallen. When the funds are reinvested, the investor receives a lower yield.
Rising interest rates, cause bond prices to fall .
Inflation may lower this power of fixed bond interest
Default risk
Reinvestment risk
Interest rate risk
Purchasing power
The risks of government bonds are:
R
I
P
Reinvestment
Interest-rate
Purchasing power
Government bonds do not have default or credit risk.
Use RIP for all government bonds except zeros.
A bond that has a rating of BB or lower and pays a higher yield to compensate for greater risk. Also called a junk bond seldom correct recommendation on the exam.
High yield corporate bonds
Hybrid, debt securities. Like most bonds they pay interest. However, the owner of the bond may convert the bond into a specific number of shares of the issuers common stock.
Convertible bond
This bond does not distribute interest in the form of a coupon payment. The interest is accrued and phantom income.
STRIPs
A convertible bond will not sell for _________ the larger of its value as a bond, or its conversion value.
Less than 
Equals (par value of the bond divided by the conversion price) times current market price of underlying stock.
Bond conversion value
When a bond is _______, the issue has the right to redeem the bond at a predetermined price at a date prior to maturity.
Callable
A _______ permits the holder to sell the instrument back to the issuer. The issuer must redeem the bond at a specific date for its principal amount (par).
Put bond
