Section II.C. Flashcards
What is Sovereign Debt?
*bonds issued by a foreign government in their own currency
*subject to credit, political, and currency risk in addition interest rate risk
What are US Treasury Bonds?
*Bonds and notes may be purchased directly from the Treasury
–Note maturity is 1 - 10 years; Bond maturity is 10 - 30 years
*Denomination can be as small as $100, but
$1,000 is more common
*Bid price of 100:08 means 100 8/32 or
$1002.50
What is Emerging Market Debt?
*debt issued by emerging market governments
*markets with some form of market exchange and liquidity in its financial markets
*these markets are not however as advanced as developed markets
*emerging markets are not considered as efficient as developed markets, nor do they have comparable accounting or legal standards
*examples include China, Brazil, India and Russia
What are Municipal Bonds?
*a debt obligation issued by a state, county or municipality
*muni-bonds are exempt from federal taxation and from most state and local taxes (depending on the type of bond)
*there are different types of muni-bonds including general obligation bonds and revenue bonds
Question: A muni bond offers a 2.4% annual yield. Your client’s federal tax bracket is 35%. What is the pre tax
equivalent yield on this bond all else held equal and not considering state income tax?
Formula not on sheet
What are Mortgage
Backed Securities?
*pooled and packaged asset backed securities where mortgages are the underlying asset
*investors receive the principal and interest payments
*MBSs must be pooled together so that they are given acceptable ratings (i.e., top two ratings by an accredited ratings agency)
*also called “mortgage pass
throughs”
What are Corporate Bonds?
*a debt obligation, which is a legal commitment to repay an amount borrowed and any promised interest over a defined period of time
*Issued by corporate entity
*Classified as AAA or high-yield (junk)
*Backed by the corporation’s ability to make payments
*The corporation’s assets “may” be used to satisfy the claims of bondholders
Types of Corporate Bonds?
*Callable bonds
–Can be repurchased before the maturity date
*Convertible bonds
–Can be exchanged for shares of the firm’s common stock
*Puttable Bonds
–Give the holder an option to retire or extend the bond
*Floating-rate bonds
–Have adjustable coupon rate
What is Preferred Stock?
Shares characteristics of equity & fixed income
–Dividends are paid in perpetuity
–Nonpayment of dividends does not mean bankruptcy
–Preferred dividends are paid before common
–No tax break
What is Commercial Paper?
unsecured short-term debt obligations
issued by corporations with maturities of less than one year
What are the Characteristics of a Bond?
Bond Rating Companies and Categories?
What is Bond Maturity?
most commonly used in finance to describe the length of time remaining (outstanding) before a debt instrument obligation must be paid back in full to the lender
What is Duration?
What is Macaulay Duration?
The Macaulay Duration of a portfolio is the average duration of each of the assets, weighted by its allocation to the portfolio.