Series 7 chapters 6-10 Flashcards
1
Q
Types of corporate bonds
A
all debt is backed by corps full faith and credit 1. secured bonds (claim to specific asset) 2. unsecured bonds aka general creditor aka debentures
2
Q
types of secured bonds
A
- mortgage bonds (secured by first or second mortgage on real property) 2. equipment trust certificates (backed by equipment, trustee has title to the equipment, plains, trains, trucks) 3. collateral trust bonds (backed by securities of another company)
3
Q
if issuer defaults, these bond holders have the same claim to the company’s assets as any other general creditor
A
Unsecured bonds / debentures
4
Q
order of liquidation
A
- secured creditors 2. expenses 3. unsecured / general creditor / debenture 4. secondary or subordinated creditors 5. preferred stock 6. common stock
5
Q
type of bond, where interest is payable only if income is sufficient, normally issued by companies in reorganization. only promises to repay principal at maturity, not interest unless sufficient income
A
Income Bonds
6
Q
Bonds with low rating (below investment grade) that must over a higher yield due to the greater risk of default. Bonds rated lower than Moodys Baa3 or SP BBB
A
High yield bonds aka junk aka low grade
7
Q
type of bond issued with low coupon rates that increase at regular intervals, issuers generally have right to call the bonds on the dates the coupon will be adjusted
A
stepped coupon bonds, aka dual coupon bonds or step up coupons
8
Q
Type of bond issued at deep discount, matures at face value and difference is considered interest. the investors carrying value (cost basis) must be accreted yearly. trades flat without accrued interest. not subject to reinvestment risk. suitable for an investor who is planning for specific future need
A
Zero coupon bond
9
Q
type of debt issued by a foreign national government. credit based on issuing government, county’s repayment ability is reflected in the yield
A
sovereign debt
10
Q
type of debt where principal and interest are paid in USD but are issued outside the US
A
eurodollar bonds
11
Q
type of debt that allows foreign entities for borrow money in the US market place. registered with the SEC and sold primarily in the US
A
yankee bonds
12
Q
type of debt sold in one country by denominated in the currency of another country
A
eurobonds
13
Q
generally offered by a BD and has different characteristics of bank CDs. not FDIC insured, fees, and commissions may apply, limited secondary market
A
brokered CDs
14
Q
short term money market instrument, unsecured debt obligations of corps (270 days or less)
A
commercial paper
15
Q
type of bond that gives the investor the ability to convert the par value of the bond into a predetermined number of shares of common stock. provide safety of principal and potential for stock growth and allows issuer to pay lower coupon
A
Convertible bond
16
Q
convertible bond conversion ratio (number of shares received at conversion)
A
par value of bond / conversion price aka the price at which the bond can be converted, set at issuance
17
Q
what is conversion parity
A
conversion parity means equivalent market value. price of convertible bond = aggregate market value of the common stock
18
Q
A type of structure product and are issued as unsecured debt. trade on exchanges, have low fees, and provide access to challenging areas of the market; performance linked to index, baskets, or bms. can be purchased on margin, sold short, traded on exchange. issuer obligated to deliver performance at maturity
A
Exchange traded notes ETNs
19
Q
type of structured product that is issued at a short term high yield note. linked to a single underlying stock aka reference security of another issuer. has a high yield / coupon. if the reference security never falls within knock in level (70 - 80% or refence security) the investor continues to receive interest. if ref security falls below knock in level and at maturity falls below initial value, investor no longer receives principal at maturity, rather gets shares of reference security.
A
reverse convertible
20
Q
who issues municipal bonds
A
states and political subdivisions (cities, counties, school districts), public agencies and authorities (transit systems, housing authorities), territories (triple tax free)
21
Q
two major types of municipal bonds
A
- general obligations bonds 2. revenue bonds
22
Q
issued for general purposes to been any need, back by full faith, credit, and taxing power of municipality (sales and income taxes and local level like property tax i.e. ad valorem, parking, licensing fees)
A
General Obligations bonds
23
Q
issued to fund a specific project, revenue from specific project back the bond. i.e. toll roads, bridges, stadiums, airports.
A
Revenue bonds
24
Q
what are the four fundamental factors in determining the ability of the issuer to gene3rate sufficient taxes to pay debt service
A
- demographics (tax base, geographic location, business, property values 2. nature of the issuers debt 3. aspects affecting the issuer’s ability to pay 4. municipal debt ratios
25
calculating property taxes
stated in millige or "mils" based on an assessed value of the fair market value. Use assessed value x tax rate. 1 mill is .001 etc.
26
types of revenue bonds
1. transportation rev (tolls) 2. special tax (gas, liquor). 3. special assessment (benefitting properties, sidewalks, sewers) 4. double barreled (backed by revenue produced by facility and GO) 5. moral obligation (if rev are insufficient we vote to fund) 6. private activity (more than 10% proceeds benefit private entity) 7. industrial development bond (issued by municipality and secured by a lease agreement with a corp user of the facility)
27
what is required when issuing a revenue bond
feasibility study - detailed report focusing on the economic viability and need for the program or service
28
when analyzing a revenue bond, what is it when someone other than the issuer provides security f the debt financing (i.e. bond insurance, letters of credit, state or other guarantees)
Credit Enhancements
29
prepared by bond counsel for the municipal bond issuer and provides opinion on 1. issuers legal valid and enforceable obligation and 2. tax exempt status of the issue
legal opinion - does not address credit quality of the bond
30
qualified vs unqualified legal opinion
Unqualified legal opinion means nothing adversely affecting the issue
31
covenants for municipal bonds
1. maintain rates 2. maintain project in good working condition 3. carry insurance on property 4. catastrophe call 5. pledge to not issue more debt unless certain tests are met 6. non-discrimination 7. flow of funds - establishes priority for payment of debt service
32
net vs gross revenue pledge bonds
always assume it is net revenue pledge bonds. start with gross revenue, deduct maintenance and operation, leaving net revenue for which debt service is paid. Gross revenue deducts debt service prior to paying maintenance.
33
debt service coverage ratio
available debt service / need for debt service always default to net revenue unless gross is specified. (deduct expenses)
34
municipal notes or tax free anticipation notes are short term issues issued to assist in financing a project to assist a municipality in managing cash flow. examples include
1. tax anticipation notes 2. revenue anticipation notes 3. bond anticipation notes 4. grant anticipation notes
35
Rating for muni notes
SP 1+, SP1, SP2, SP3. MIG1, MIG2, MIG3, SG
36
long term securities that are marketed as short term investments, debt securities that offer a variable rate of interest adjusted at specific intervals. holders can redeem for par plus accrued interest at any time rates are reset (put provision)
variable rate demand obligations VRDO
37
long term investments with variable interest rate that is reset at periodic intervals through a Dutch Auction. Auction sets lowest interest rate at which all securities being offered for sale will clear the market. do not have a put provision
Auction Rate Securities ARS
38
created by state and local gov to provide municipal entities a place to invest funds, not open to public
Local Government Investment Pools LGIPs
39
type of college savings plans, purchases buys college tuition credits, locks in tuition costs and current levels, protects against future cost increase, not self-directed
prepaid tuition plans
40
529 plans
primarily a type of college saving plan, owner chooses a plan but may alter the investment direction. funded with after tax dollars. max contribution is gift tax 15k per person per year. can front load 5 years of contributions. max withdrawal of 10k per year for grades k-12 and up to 10k lifetime limit for qualified student loans or apprenticeship programs
41
529 ABLE plans
available to disabled individuals who receive ss disability, medicate, or private insurance payments. no front loading, 15k max contribution per year. disability payments can continue as long as account value doe not exceed 100k; distributions are tax free if used to pay qualified expenses.
42
how are muni bonds taxed
Interest received is exempt from fed taxes but may be subject to state and local taxes. if you buy from the state you live in, might not have state tax. Bank Qualified (BQ) bonds are issued by qualified small issuers that issue no more than 10m per year. BQ bonds allow banks to deduct 80% of interest cost paid to the depositors on the funds that are used to purchase these bonds
43
who benefits most from tax considerations in muni bonds
those in higher tax bracket. not suitable for those in lower tax brackets or as an investment in retirement accounts (even if investor is in high tax bracket)
44
zero coupon munis
annual accreted amounts are considered tax free interest, accretes to par at maturity
45
capital appreciation bonds (CABs)
issued at deep discounts, investment return on initial principal value is reinvested at a compound rate until maturity. at maturity, investors receive a single payments representing the initial amount and investment return. discount is not accreted
46
private activity bonds
typically taxable for investors who are subject to the alternative minimum tax (AMT) yields are higher than non-AMT bonds
47
taxable equivalent yield formula
tax free yield / (100% - tax bracket%). if exempt from state and fed use tax free yield / (100% - fed tax + state tax bracket%)
48
net yield formula
taxable yield x (100% - tax bracket)
49
original issue discount OID bond
basis must be accreted at a rate that will bring basis to par at maturity. if sold prior to maturity, capital gain or loss determined by difference between the bond's cost basis and sales proceeds. if held to maturity, accreted adjustment is considered tax exempt interest with no taxable gain
50
premium bond
basis must be amortized at a rate that will bring basis to par at maturity. if sold prior to maturity, capital gain or loss determined by difference between bond adjusted cost basis and sale proceeds. if held to maturity, amortized adjustment is not deductible which results in not taxable loss
51
secondary market discount bond
issued at par but later is purchased at discount in the secondary market. basis is not adjusted. when bond is sold or matures, the accreted market discount is taxed as ordinary income
52
treasury debt
issued by US government, highly liquid, no credit risk. interest is taxable at federal level but not state or local tax. Minimum face value is 100, but usually in 1,000, issued in book entry form. accrued interest actual/365
53
Treasury discount fixed income security, maturity of up to one year. sold in weekly auctions
T-Bill
54
Treasury interest baring fixed income, pays semi-annual and are usually 2-10 years. sold in periodic auction.
T-note
55
Treasury interest baring fixed income, pays semi-annual and are usually over 10 years. sold in periodic auction.
T-bond
56
pricing of government securities
1/32 of a point. except T-BIlls which are quoted on a discounted yield basis. Bid price 2.94% (higher) discount and ask price 2.90% discount from par.
57
treasury product that protects from inflation. offers a stated coupon rate that remains constant with interest paid semi-annually. Principal is adjusted for rate of inflation based on CPI. at maturity, you will always get at least par or adjusted up principal
TIPS
58
Created in secondary market, non-interest bearing (zero coupon debt). Takes a t-note or t-bond and separates each payment
T-STRIPS "Separate trading of registered interest and principal securities "
59
Bidding Treasury auctions
T-Bills - weekly, done on Monday or Tuesday settled on Thursday. non-competitive bids are placed by auction, quantity only, filled first, bidder agrees to pay the lowest price (highest yield) of accepted competitive bid. Competitive bids - placed by large financial institutions, indicate both quantity and price. in secondary market, all treasury is settled T+1
60
Government agency securities
debt instruments issued and or guaranteed by fed agencies and GSEs, exempt from state and def registration, quoted in 32nd, accrued interest based on 30 days in the month and 360. Issued in book entry form. Interest portion is fully taxed
61
Types of government agencies
1. farming loans FFCB Fed Farm Credit Bank 2. mortgage backed securities GNMA, FNMA, FHLMC. note - most common security issued by gov agencies is a mortgage-back pass through certificate. subject to prepayment risk. GNMA may is only one guaranteed by gov
62
Mortgage-backed bonds created by dividing mortgage pools (GNMA, FNMA, and FHLMC) into various bond classes. Distributes the impact of prepayment risk to different tranches. Interest is generally paid monthly (fully taxable) with principal paid sequentially and issued in $1,000. Subject to 1933 ACT and Trustee Indenture act of 1939.
Collateralized Mortgage obligations (CMOs)
63
CMO structures - Sequential Pay / Plain Vanilla
Equal tranche receives interest payments but only tranche A gets principal until tranche A is fully retired. Then moves onto tranche B. Tranches B and C have longer lives
64
CMO structures - Planned amortization class (PAC bond)
provides most predictable cash flow and maturity, designed for more risk averse investors, issuer sticks to pre-payment schedule.
65
CMO structures - companion tranche
Provides the lease predictable cash flow and maturity, if prepayments are fast, support bond holders get payments fast; reflects excess or shortfalls in payments to PACs and TACs.
66
CMO structures - Z tranche
Last tranche to receive payments, similar to a zero-coupon bond.
67
Repackage individual fixed income assets into a product that be be separated into tranches and sold in the secondary market. Referred to as CFOs since the assets being packaged (mortgages, corp debt, auto loans) serve as collateral for investors. Each tranches has different maturities and interest payments. Do not limit investments to mortgages. Primary purchase is to distribute risk.
Collateralized Debt Obligations CDOs
68
The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon. since a T-STRIP is a form of zero-coupon bond, it clearly has more interest-rate risk than another long-term bond
true
69
Collateralized mortgage obligations (CMOs) make interest payments to investors:
monthly
70
three types of investment companies
1. Face amount certificate company 2. unit investment trusts 3. management companies (open end and closed end)
71
disadvantage of bond funds
Interest rate risk never decreases, greater degree of interest rate risk than just buying and holding a bond
72
POP
public offering price = NAV plus any applicable sales charges
73
when are NAVs calculated
4pm
74
sales charge clac
sales charge % (POP-NAV)/POP
75
max sales charge
8.5%
76
up front sales change where the total investment less the sales charge is directed to the portfolio
front-end sales load
77
charge assessed at the time an investor redeems, percentage decreases as the holding period lengthens, typically associated with class B
Back end or contingent deferred sales charges
78
Annual fee levied against the funds assets that allows distribution costs to be borne by the fund. used to finance promotion, advertising, and commissions. if a written contract exists, it may be paid to RRs who are still employed with a firm or retiring RRs based on existing assets. typically higher for class C
12b-1 fee
79
what are the rules of no-load funds
no front or back end fees and no 12-b1 fees that exceed .25%
80
what is the largest expense for a mutual fund
mgmt fee
81
Breakpoint discounts are only available for which shareclass
Shareclass A
82
can mutual funds be purchased in fractional shares?
yes
83
Optional provision that allows investors to qualify for a breakpoint without initially depositing the entire amount required. not binding for customers but will hold shares in escrow
letter of intent
84
letter of intent is good for how many months and can be backdated for how many days
good for 13 months and good for 90 days
85
Right to add up all purchases made from same family of funds. when a breakpoint is crossed, current and future purchases will have lower sales charge.
rights of accumulation ROA
86
what is the nav also called
BID price. ask price is the offering price.
87
method of investing which involves making the same periodic investment regardless of share price over a fixed period. does not grantee attainment of any specific investment goals. results in cost per share being less than price per share
dollar cost averaging DCA
88
funds are required to send investors the payment for their shares within how many calendar days
7
89
fee that is assessed against investors who redeem their shares after holding for a short period (usually one year or less)
redemption fee
90
Allows investors to receive regular period payments from their accounts. can be fixed dollar amount, fixed percentage, fixed time, fixed number of shares. clients should not be advised to engage in a systematic purchase and withdrawal plan at the same time
withdrawal plan
91
sale violation where soliciting sales of shares amount just below breakpoint
breakpoint sale
92
other sale practice volitions
recommending purchases from dif fund families due to potential for higher sales charges, excessive purchases of class B shares, switching fund families
93
earnings from a mutual fund are distributed to shareholders and reported on what IRS form
1099-DIV
94
Mutual fund shore term cap gains are distributed as income and cap gains are distributed once per year, always considered long term cap gain. doesnt matter how long you held stock, this is about fund's underlying holdings
true
95
when are distributions taxed, regardless of reinvested
in the year received
96
what is subchapter M
relives a fund's burden of paying tax on income as long as MF passes through at least 90% of net investment income to its investors. Net income - div = interest less expenses and mgmt fee. if qualifies, only taxed on undistributed portion, burden for paying taxes falls on shareholders
97
investor's cost basis
amount invested plus any reinvested distributions
98
what are investor in MFs taxed on when redeeming
proceeds less (cost plus all cash and reinvested divs_
99
type of investment company, issues debt certificates, issuers promises face value at maturity or surrender value if presented prior to maturity
Face amount certificate company FAC
100
type of investment company that is supervised but not managed, portfolio generally remains fixed for life of trust, ownership usually referred to as shares of beneficial interest (SBI)
Unit Investment Trust UIT
101
Type of fund - can be sold short or on margin, trades on secondary market, shares mad trade at a discount or premium to NAV. sold as NAV + commission. can issue preferred stock and bonds.
Closed end fund
102
type of fund - portfolio consists of a basked of securities that mirrors an index, low expenses, shares trade on secondary market and can be sold short, commission is charged. priced throughout the day.
Exchange traded funds ETF
103
difference between Index fund and exchange traded fund
for index funds, shares are redeemed by the fund and cannot be sold short, dont change on exchange. does not have sales loads (ETF charge commission). nav priced once a day. does not allow leverage . Index funds are best for dollar cost averaging.
104
difference between asset allocation and balance funds
balance fund the allocation doe not change 60-40. Asset allocation changes
105
ETF that outperforms the benchmark. designed for short term trading.
leveraged ETF
106
designed to perform in a manner that is inverse to the index it is tracking (like short selling). if the index falls, this ETF will rile. similar to short selling with the unlimited risk. designed for short term trading.
Inverse ETF
107
Fixed annuity
Risk is at the insurance company, is not a security, in a general account, safe, secure predictable investments, guarantees a fixed payout so not great against inflation
108
Variable annuity
Risk is at the annuitant, is a security, separate account,, sub accounts that meet investor objectives, inflation hedged due to investment in equities
109
a hybrid insurance / investment vehicle that allows for the tax-deferred growth of contributions . a person invests funds on either a lump sum or periodic basis, has a death benefit
annuity
110
immediate annuities
purchased in one lump sum with the payout generally starting immediately
111
deferred annutities
purchased with period payments and payouts typically starts after retirement
112
an investment company product that is registered under the 1940 act, registered with SEC, sold by prospectus, investments may be changed during the accumulation phase. has sub accounts (aggressive growth, S&P, high yield)
separate account
113
accumulation phase
during this time, account is valued in accumulation units. units are purchased after tax, investment income is tax deferred until withdrawn, accumulation units are invested in separate accounts. purchase price is referred to as accumulation unit value AUV
114
annuity charges and expenses
mgmt fees, sales charge (no max), admin expense, mortality risk charges , surrender fee.
115
L shares
higher commissions and fees but shorter surrender period for annuity products
116
what shares are best for investors in MFs that will be holding a while and invest a lot. for annuities was is best if holding for a while? for holding short?
A shares bc. breakpoints. B shares because no surrender fee. L shares for short.
117
annuity withdrawals
earnings are withdrawn first and taxable, premature withdrawals of earnings prior to 59.5 are subject to a 10% penalty. gross amount is added to taxable income
118
Death benefit - if the annuitant dies during the accumulation pahse, the payout will represent what
the greater of the total contributions made or the current value of the contacts. amount above cost basis would be taxable as income to beneficiary
119
annuity phase
AKA payout, withdrawal, or annuitization phase - when receiving benefits at annuitization, accumulation units are converted into a fixed number of annuity unites.
120
what are annuity unit values based on
1. age and gender 2. life expectancy 3. payout option 4, value of the separate account. payout is established by multiplying the fixed number of annuting units by fluctuating value
121
straight life annuity payout
highest possible payout with highest risk. annuitant receives payments for life. no beneficiary payments
122
life annuity with period certain
payments are made for life or to beneficiary for specified minimum number of years
123
joint and last survivor annuity
payments are made for life so long as one annuitant is living
124
unit refund life annuity
annuitant receives amount equal to initial investment and any payment left over goes to beneficiary
125
assumed interest rate (AIR) for annuities
If account performance is higher than AIR the payment would increase, if lower payments will decrease.
126
what client is best for annuity products
AGED 30-55, SEEKING TAX-DEFERRED GROWTH TO OFFSET INFLATION, already maxed qualified plan contributions. not liquid, so do not sell to old people or people with short investment time horizons
127
1035 exchnage
no tax on going from one annuity to another, customer must benefit, exchange must be signed off by client and signed by principal
128
life insurance terms
beneficiary - person who receives the money from the policy. insured - the person whos life policy is written on 3. premium - amount of money policy holder pays to keep policy 4. cash value is the policy holder's equity in a life insurance policy 5. death benefit - amount beneficiary receives when the insured dies 6. riders - additional benefits added to the policy
129
characteristics of variable life insurance
death benefits (fixed minimum then grows based on performance, no guaranteed cash value, allows a loan against it, premiums are paid in fixed amount at fixed intervals, risk that returns will be lower than anticipated, policy holder picks sub accounts in separate acct.
130
tax treatment of variable life insurance
1. policy surrender (FIFO, premiums paid were already taxed and returned first, excess is taxable) 2. loans against policy are tax-free 3. death benefit are tax free to beneficiary 4. estate tax - death benefit is included in the deceased estate. person who receives money arent taxed
