Investments Lesson 5 Flashcards
US Treasury Securities
Are all non taxable at state & local level
Non/marketable securities
Not easily bought or sold
EE bonds
HH bonds
I bonds
Series EE Bonds
Sold at face value
$25 min $10,000 annual max
Non marketable, non transferable
Offered at 1/2 face value
Does not pay interest
Redeemable at 1 year, 3 months interest penalty for less than 5 years
Not subject to federal income tax unless not redeemed for education expenses
Series HH Bonds
Pay interest semi/annually
Not issued since August 2004
Series I Bonds
Inflation indexed sold by US gov Sold at face value No guaranteed rate or return Interest consists of: Fixed rate of return & inflation component adjusted every 6 months
Marketable US Treasury Issues
T-Bills: less than 1 year, discounted yield (do not pay interest)
Treasury Notes: maturities between 2-10 years, interest semi-annually
Treasury Bonds: maturities greater than 10 years, interest semi-annually
All sold in denominations of $100 or more
Sold on auction basis (lowest yield wins auction)
Original Issue Discount (OID)
Issued at discount from par
Zero coupon bond
Recognize imputed/phantom income
Treasury Inflation Protected Securities (TIPS)
Inflation & purchasing power protection
Principal/par value adjusts for inflation then coupon applied to new principal
Coupon rate does not change
Separate Trading of Registered Interest & Principal Securities (STRIPS)
Highly liquid
Appropriate for low risk, high liquidity, specific time horizon investors
Example Exam Question:
Which mitigate against purchasing power risk?
A. TIPS & STRIPS B. STRIPS & EE Bonds C. TIPS & EE Bonds D. I Bonds & TIPS E. I Bonds & EE Bonds
D
Exception: direct obligation of government & backed by full faith & credit of US government
GNMAs
GNMAs
Pool of FHA/VA guaranteed mortgages
Each month distributes interest & principal payment to investors
Agency bonds __ backed by full faith & credit of US government
Are not
Biggest risk with mortgage-backed securities is __?
falling interest rates. Mortgages could get repaid early, bond get retired early which leaves reinvestment problem
Secured Bonds
Mortgage backed securities: both principal & interest, biggest risk is prepayment risk
Collateral trust bonds: backed by asset owned by company issuing bonds, held in trust by 3rd party, in event of default, bond holders entitled to asset being held in trust
Collateralized Mortgage Obligations
Investors divided into tranches A-Z which represent short, intermediate, & long term tranches
Interest distributes pro-rata
Principal repayments retire tranches sequentially
Meant to mitigate against prepayment risk associated with mortgage backed securities