Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP EXAM - Giauque Flashcards > IP - Chapter 7 - Fixed Income Securities* > Flashcards

IP - Chapter 7 - Fixed Income Securities* Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

Credit instruments with fixed maturity dates

A

Fixed income securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Short Term

A

A year or less

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

These pay interest during the life of the security and make a final FV payment at maturity.

A

Long Term Fixed Income Securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Period of time through which issuer has control over bond proceeds and the period of time it must continue to pay interest/coupon payments

A

Maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

When a bond issuer calls bonds from a holder and then issues new bonds at a lower coupon rate thereby reducing the cost of its debt.

A

Refunding

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Two largest fixed income markets…

A

1) US Treasury

2) Mortgage Related Bond Markets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the maturities of T-Bills?

A

4 week , 13 week , 26 week : Auctioned on a weekly basis

52 week : Auctioned every 4 weeks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Yield in the last bid accepted in the competitive process before the Treasury needs are sold out. It is the yield that all purchasers of the T-Bills receives.

A

Stop Out Yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

For non-competitive bids made to the purchase of T-Bills, the IR received is the same as the _________________ .

A

Stop-Out Yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

All non-competitive bidders are guaranteed to receive the dollar amount of their bid up to _______ per auction.

A

$5MM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

In a typical treasury auction how is the amount available to competitive bidders determined?

A

Total Auction Amount minus Noncompetitive Bidders = Amount available for competitive bidders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Tax rules with T-Bills?

A
  • Earnings subject to Federal Income Tax

- State and Local tax free

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How do corporations regularly raise short term funds?

A

Issuing Commercial Paper

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Serve as a proxy for the RFR?

A

T-Bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Commercial paper is issued in denominations of ____________ and matures in ___________ .

A

$100,000 or more

270 days or less (more commonly 6 months or less)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

CDs come in 2 forms:

A

Negotiable (JUMBO)

Non-Negotiable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Non-negotiable CDs:

Can be cashed prior to maturity by __________ .
Deposits of at least ___________ .
Can/Cannot be purchased or sold in secondary market?

A

Foregoing interest payments (surrender penalty)
$500
Cannot

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Negotiable CDs:
Short term deposits of ___________ or more.
Can/Cannot be purchased or sold in secondary market?
Used typically by _____________ .

A

$100,000
CAN be purchased/sold in secondary market allowing holder to cash-out without penalty
Large Institutional investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Negotiable instruments used to finance short term debt needs for small companies.

A

Bankers Acceptances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Similar to a line-of-credit by a bank, these are typically applied in foreign commerce where the bank acts as intermediary between US and foreign company to facilitate a business transaction

A

Bankers Acceptances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Short Term Securities that banks use to borrow money from each other using an underlying security as collateral

A

Repurchase Agreements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Bank to bank lending rate

A

Federal Funds Rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

FED interest rate charged to financial institutions for loans

A

Discount Rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Muni Bond Interest taxation?

A
  • Exempt from federal tax

- Exempt from state tax (if resident is state of issue)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Muni Bond Capital Gain Taxation?

A

Fully subject to federal and state taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

U.S. deposits in banks outside of the U.S. providing short term loans to credit worthy foreign companies

A

Euro Dollar Deposits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Banks issue and sell mortgages pooled together in funds issued to investors. Interest payments go to investors.

A

Mortgage backed security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

If borrowers default on their mortgage what happens?

A

Real Estate pledged as collateral for the loan is liquidated and used to pay back the investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Unsecured bonds

A

Debenture

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

When a bond issuer anticipates that interest rates may be lower in the future it may include a _____________ in the bond.

A

Call provision

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Bonds that rely on the creditworthiness of the issuer and are not backed by any collateral. Higher rates to compensate investors for additional risk taken.

A

Debenture Bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What kind of risk are callable bond holders most exposed to?

A

Reinvestment risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is usually paid to bond holder when bonds are called

A

Premium over par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Bond that allows the owner to sell back to the issuer at a predetermined price prior the stated maturity of the bond

A

Puttable Bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What do puttable bonds protect the bondholder from?

A

Increases in interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Owners of these have the benefit of receiving fixed payments from a traditional bond but also prefer option to participate in capital gains

A

Convertible Bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Do not make regular interest payments, all interest is paid at maturity. Not subject to reinvestment risk.

A

Zero Coupon Bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Bonds with multiple maturity dates permits issuer to partially retire the bond issue at dates specified in the bond.

A

Serial Bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Requires cash basis taxpayers to report income on an accrual basis

A

Doctrine of Constructive Receipt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Requires holders of a zero coupon bond to pay tax on interest income as earned rather than when received.

A

OID Rule

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

When bond issuer sets aside a portion of the principal of the bond each year for repayment of investors at maturity.

A

Sinking Fund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Interest earned if purchasing into a bond fund between coupon payments.

A

Accrued Interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Interest for corporate and muni bonds calculated using a _______ day year.

A

360

44
Q

Interest for Government Bonds calculated using ______ day year.

A

365

45
Q

Full price of bond less interest

A

Clean Price

46
Q

PV of future cashflows of a bond where accrued interest is included in price.

A

Dirty Price

47
Q

Traditional normal fraction used for treasury securities prices is _______ .

A

1/32

48
Q

T-Notes currently issued for ____________ .

A

2, 3, 5, 7, and 10 years

49
Q

A T-Bond term is up to ____ years.

A

30

50
Q

How many dollars worth of T-Notes and T-Bonds can be purchased in the non-competitive bidding process?

A

$5MM

51
Q

Up to ____ % of the initial offering can go in the competitive bidding process.

A

35

52
Q

Allow investors to hold and trade individual interest and principal components of eligible T-Notes, T-Bonds, and TIPS as separate securities.

A

Treasury STRIPS

53
Q

How is the principal amount of a TIPS bond adjusted?

A

Adjusted by changes in CPI every 6-months

54
Q

What happens if deflation occurs on a TIPS?

A

Interest Paid Decreases

55
Q

What is the investor paid on a TIPS when it matures?

A

The greater of inflation adjusted principal amount or the original principal investment.

56
Q

What are the maturities of a TIPS?

A

5, 10, 30 years

57
Q

These are attractive when short term interest rates are expected to rise rapidly.

A

Floating Rate Notes

58
Q

How are Floating rate notes priced?

A

Based on discount rates in auctions of 13 week T-Bills plus spread. (Can be held or sold prior to maturity.)

59
Q

When does the income tax on interest earned (on a savings bond) have to be paid?

A

Not until the bond is redeemed

60
Q

How much can be purchased of a savings bond per series per year? What is the max amount that can be purchased with a tax refund?

A
  • $10,000

- $5,000 (of $10,000 limit)

61
Q

When can savings bonds be redeemed?

A

Any time after 12 months, but a penalty of 3 months interest is charged if bonds are redeemed within 5 years

62
Q

In some circumstances, interest earned from savings bonds redeemed to pay for education expenses is ____________________.

A

Exempt from Federal tax

63
Q

Directly issued mortgage backed securities with government guarantees to investors.

A

GNMA

64
Q

What are the maturities of SERIES EE and SERIES I SAVINGS BONDS?

A

30 years

65
Q

How do I calculate interest to be earned by SERIES EE Bonds?

A

For Bonds issued may 1997 - April 2005 bonds earn variable rates based on 90% of 6 month average of 5 year treasury security yields

For Bonds issued after April 2005 earn a fixed stated percentage.

66
Q

How do I calculate the interest earned on SERIES I BONDS?

A

Fixed stated percentage upon issuance + Inflation Rate calculated semi-annually based CPI

67
Q

What is the main risk associated with MBS’s?

A

Prepayment Risk

68
Q

Non-US Government sponsored securities that encourage investors to provide capital for home purchases referred to as ‘US Government sponsored securities’

A
  • FNMA
  • FHLMC (Federal Home Loan Mortgage Corp)
  • FHLB (Federal Home Loan Bank)
  • TVA (Tennessee Valley Authority)
69
Q

Two types of municipal bonds

A

General Obligation Bonds

Revenue Bonds

70
Q

How are general obligations backed?

A

Backed by taxing authority of government issuing bond

71
Q

How are revenue bonds backed?

A

By a particular project with a typically higher yield

72
Q

Who are collateralized mortgage obligations created by?

A

Private investment firms

73
Q

Typically higher yield means that the investor is undertaking more _________ .

A

Risk

74
Q

Used to finance classic government projects like schools, police stations, fire stations, roads and bridges.

A

Public Purpose Municipal Bonds

75
Q

Use to finance some component of private business use (if more than 10% of proceeds are for private business use)

A

Private Activity Purpose Muni Bond Funds

76
Q

Investing in private purpose municipal bonds subject to federal income tax when taxpayer subject to _________ .

A

AMT

77
Q

What is important to consider when comparing Muni bonds to Corporate Bonds?

A

After Tax Yield

78
Q

What is the biggest type of risk associated with owning Muni Bonds?

A

Credit Risk

79
Q

Muni Bond insurance attempts to mitigate what type of risk?

A

Credit Risk

80
Q

Two ways corporations can access capital markets?

A

1) Issuance of Bonds

2) Issuance of Stock

81
Q

What types of payments are tax deductible for corporations?

A

Interest paid on bonds

82
Q

Legal document specifying the rights of bondholders and duties of a corporation.

A

Indenture

83
Q

A bond issue not backed by collateral

A

Debenture

84
Q

What has a lower yield, convertible or non-convertible stock?

A

Convertible because an investor has the option to convert to stock

85
Q

Offers the holder equity ownership in a company but for the time being prefer the relative safety of fixed interest payments associated with bonds

A

Convertible Bonds

86
Q

When first buying a convertible bond, bondholders are given a _____________ .

A

Fixed conversion rate to stock price

87
Q

Stock option that can be exercised at some specific future date for a specified price

A

Warrant

88
Q

Non-investment grade bonds are also known as

A

High Yield or Junk Bonds

89
Q

Created by private investment firms backed by a pool of mortgages

A

CMO’s

90
Q

Issued by government agencies - guaranteed by federal government. These pool mortgages together and pass through payments of interest, principal, and prepayments.

A

Mortgage Backed Securities

91
Q

3 Main risks associated with CMO’s and MBS’s

A

1) Prepayment Risk
2) Reinvestment Risk
3) Interest Rate Risk

92
Q

CMO’s in some ways are similar to STRIPS especially by their _____________ .

A

Tranche Payments

93
Q

Another name for U.S. dollar denominated bonds issued by foreign governments and companies that state principal, interest, coupon in U.S. dollars. Protects investors against currency fluctuations.

A

Yankee Bonds

94
Q

Legal document that specifies rights of bondholders and the duty of an issuer

A

Indenture

95
Q

3 Forms of foreign Bonds

A

1) Yankee (US Dollar Denominated Bonds)
2) Eurodollar Bonds
3) Foreign Pay Bonds

96
Q

These bonds are required to be registered by the SEC and are issued by foreign governments, stated in US dollars.

A

Yankee Bonds (US Dollar Denominated)

97
Q

Bonds traded outside of the USA, not subject to SEC registration, issued by foreign governments and corporations. (Often used by foreign based institutional investors).

A

Euro Dollar Bonds

98
Q

Bonds issued by foreign governments in their own local currency, traded outside the USA, not subject to registration by the SEC

A

Foreign Pay Bonds

99
Q

How is interest earned subject to tax on a foreign pay bond?

A

Taxed in jurisdiction where bond was issued

100
Q

Commonly used by individuals or businesses who need access to financing but do not have access to financing from foreign markets

A

Promissory Notes

101
Q

This type of contract sold primarily to large institutional investors, like a CD, most are issued for $1MM or more, backed by state guarantee funds

A

GIC - Guaranteed Income Contract

102
Q

Essentially a corporate bond with a call option to purchase a security at a specified price.

A

Convertible Security

103
Q

If a convertible bond is called the bondholder has 2 options:

A

1) Accept the call value

2) Convert to Common Stock

104
Q

Bonds typically make _______________ coupon payments.

A

Semi-Annual

105
Q

Moody’s and S&P rate bonds based on their ____________ risk.

A

Default

106
Q

Early tranches receive principal payments first while later tranches receive principal in future- therefore later tranches will require __________________ .

A

Higher Rates of Return

107
Q

Commercial Paper is issued by ________________ .

A

Corporations

CFP EXAM - Giauque Flashcards (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions