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SIE EXAM > UNIT 2 > Flashcards

UNIT 2 Flashcards

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1
Q

BOND ISSUERS

A

.CORPORATE, FEDERAL GOVT, AND MUNICIPAL GOVT

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2
Q

PAR VALUE OF A BOND IS ALWAYS

A

$1000 UNLESS OTHERWISE STATED

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3
Q

ANOTHER TERM FOR PAR VALUE IS

A

THE PRINCIPAL OR FACE VALUE

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4
Q

MATURE DATE

A

THE DATE THE INVESTOR RECEIVES THE LOAN PRINCIPAL BACK

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5
Q

COMMON MATURITIES ARE IN THE RANGE OF

A

5-30 YEARS

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6
Q

TERM BOND

A

STRUCTURED SO THAT THE PRINCIPAL OF THE WHOE ISSUE MATURES AT ONCE

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7
Q

SINKING FUND ACCOUNT IS USED BY

A

TERM BOND ISSUERS TO ACCUMULATE MONEY TOO RETIRE THE BONDS AT MATURITY

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8
Q

SERIAL BOND

A

SCHEDULES PORTIONS OF THE PRINCIPAL TO MATURE AT INTERVALS OVER A PERIOD OF YEARS UNTIL THE ENTIRE BALANCE IS REPAID

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9
Q

BALLOON BOND

A

THE ISSUER REPAYS PARTOF THE BOND’S PRINCIPAL BEFORE THE FINAL MATURITY DATE, BUT PAYS OFF THE MAJOR PORTION OF THE BOND AT MATURITY; SERIAL AND BALLON

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10
Q

THE TERM SERIES OFTEN REFERS TO TYPES OF

A

SAVINGS BONDS

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11
Q

THE COUPON ON A BOND REPRESENTS

A

THE INTEREST THE ISSUER HAS AGREED TO PAY THE INVESTOR

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12
Q

THE INTEREST RATE OF THE BOND IS CALLED THE

A

COUPON RATE

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13
Q

THE COUPON RATE IS ALSO CALLED THE

A

STATED YEILD OR NOMINAL YEILD

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14
Q

HOW IS THE COUPON RATE CALCULATED?

A

FROM THE BOND’S PAR VALUE, STATED AS A PERCENTAGE OF PAR; (COUPON% x PAR) = COUPON RATE

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15
Q

WHAT HAPPENS IF THE BOND TRADES BETWEEN COUPON PAYMENTS?

A

THE NEW OWNER MUST PAY THE OLD OWNER THE AMOUNT OF INTEREST EARNED TO DATE AT THE TIME OF THE SETTLEMENT

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16
Q

THE BUYERS OF ZERO-COUPON BONDS DO NOT PAY ACCRUED INTEREST BECAUSE THEY ARE

A

NOT INTEREST BEARING

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17
Q

THE BUYERS OF ZERO-COUPON BONDS DO NOT PAY ACCRUED INTEREST BECAUSE THEY ARE

A

NOT INTEREST BEARING

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18
Q

ACCRUED BOND INTEREST IS PAID ON A

A

SEMIANNUAL BASIS

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19
Q

ONCE A BOND IS TRADING IN SECONDARY MARKETS, IT CAN TRADE AT A

A

1: PRICE OF PAR
2: PREMIUM OF PAR
3: DISCOUNT OF PAR

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20
Q

BOND PRICING IS MEASURED IN

A

POINTS

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21
Q

EACH BOND POINT EQUALS

A

1% OF FACE VALUE/ PAR

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22
Q

BOND PRICES WILL RISE AND FALL WITH THE FLUCTUATION OF

A

INTEREST RATES

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23
Q

BOND PRICES HAVE AN ______ RELATION TO INTEREST RATES

A

INVERSE

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24
Q

A BOND’S YEILD EXPRESSES

A

THE CASH INTEREST PAYMENTS IN RELATION TO THE BOND’S VALUE

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25
Q

A BOND’S YEILD IS DETERMINED BY

A

1: ISSUERS CREDIT QUALITY
2: PREVAILING INTEREST RATES
3: TIME TO MATURITY
4: ANY FEATURES THE BOND MAY HAVE

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26
Q

NOMINAL YEILD

A

STATED YEILD; IS SET AT THE TIME OF ISSUE

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27
Q

CURRENT YEILD

A

MEASURES A BOND’S ANNUAL INTEREST PAYMENT RELATIVE TO ITS MARKET PRICE; ANNUAL COUPON PAYMENT DIVIDED BY MARKET PRICE = CURRENT YEILD

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28
Q

YEILD TO MATURITY

A

REFLECTS THE ANNUALIZED RETURN OF THE BOND IF HELD TO MATURITY

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29
Q

calculating yield to maturity

A

the difference between the price that was paid for a bond and par value received when the bond matures

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30
Q

if the bond was purchased at discount

A

the investor makes money at maturity

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31
Q

if the bond is purchased at premium

A

the investor loses money at maturity

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32
Q

yields are measured in

A

basis points

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33
Q

a basis point is

A

a measurement of yield equal to 1/100 of 1%

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34
Q

yield to maturity is sometimes called a bond’s

A

basis

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35
Q

a bond trading at 5.83 basis means the bond has a YTM of

A

5.83%

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36
Q

yield to call

A

a bond will a call feature may be redeemed before maturity at the issuer’s option; investor receives principal soon than anticipated

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37
Q

yield to call calculations reflect

A

early redemption premium loss or discount gain

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38
Q

paying “100” means they paid what percentage of par

A

100%

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39
Q

a 6% corporate bond trading on a 7% basis is trading

A

at a discount

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40
Q

THE 3 MAJOR CREDIT RATING AGENCIES

A

1: FITCH RATINGS INC.
2: MOODY’S INVESTORS SERVICE INC.
3: STANDARD AND POOR’S RATING SERVICE

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41
Q

A.M. BEST CO. INC. IS HISTORICALLY ASSOCIATED WITH

A

RATING INSURANCE COMPANIES ABILITY TO PAY CLAIMS AND THEIR DEBT ISSUES

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42
Q

DEBTS QUALITY =

A

SAFETY

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43
Q

INVESTMENT GRADE BONDS ARE RATED

A

BBB OR Baa AND HIGHER

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44
Q

INVESTMENT GRADE BONDS HAVE _____ LIQUIDITY RATES THAN NON-INVESTMENT BONDS

A

HIGHER

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45
Q

THE HIGHER THE BOND RATING,

A

THE LOWER THE YIELD

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46
Q

LOWER- GRADE BONDS ARE REFFERED TO AS

A

JUNK BONDS; HIGH YIELD

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47
Q

the less credit-worthy the borrower,

A

the more risk to the lender

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48
Q

rating organizations rate bonds issues that

A

1: have been paid to be rated
2: have enough shares outstanding to be rated

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49
Q

a bonds sensitivity to interest rates is called its

A

volatility

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50
Q

the more a bond moves in response to interest rates is said to be more

A

volatile

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51
Q

the more time left to maturity

A

the more volatile because its due to fluctuate with interest rates

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52
Q

the lower a bond’s coupon rate

A

the more volatile it is

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53
Q

the lower a bond’s coupon rate

A

the more volatile it is

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54
Q

duration

A

a way of measuring a bond’s volatility that combines maturity and coupon rates

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55
Q

a higher duration means

A

a more volatile price

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56
Q

features attached to a bond

A

1: call feature
2: put feature
3: convertible feature

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57
Q

call feature of a bond

A

allows an issuer to call a bond before maturity

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58
Q

when do issuers use the call feature of a bond?

A

when interest rates are plummeting

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59
Q

put feature of a bond

A

opposite to call feat; investor can put the bond back to the issuer before it matures

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60
Q

when do investors use the put feature of a bond?

A

when interest rates are high

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61
Q

convertible feature of a bond

A

issued by corporate issuers; allowing the investor to convert the bond into shares of common stock; exchange debt for ownership

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62
Q

when bonds have features that benefit the issuer, thy typically have

A

higher coupon rates to appear desirable to investors

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63
Q

zero coupon bonds

A

issuer’s debt obligations that do not make regular interest payments

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64
Q

zero coupon bonds are sold

A

at a deep discount and mature at par

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65
Q

zero coupon bonds are _____ volatile than other bonds with similar maturities

A

more

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66
Q

zero-coupon bonds are issued by

A

1: corporations
2: municipalities
3: the U.S. treasury
4: broker-dealers

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67
Q

zero coupon bonds issued by a broker dealer are called

A

treasury receipts

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68
Q

broker- dealer zero coupon bonds are built from

A

a basket of t bonds

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69
Q

U.S. treasury issued zero coupon bonds are called

A

STRIPS

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70
Q

unlike STRIPS, a treasury receipt is

A

not backed by the full faith and credit of the treasury

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71
Q

though the interest is paid at maturity, owners of zero-coupon bonds

A

have to pay taxes on the interest annually

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72
Q

“phantom income” is also known as

A

annual accretion of the discount on a zero-coupon bond; taxes due annually

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73
Q

secured corporate bonds are back by

A

various kinds of assets owned by the issuer

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74
Q

unsecured corporate bond debt is back by

A

the reputation, credit record, and financial stability of the issuer

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75
Q

backed by a company’s full faith and credit refers to

A

unsecured corporate bonds

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76
Q

types of secured corporate bonds

A

1: mortgage bonds
2: equipment trust certificates
3: collateral trust bonds

77
Q

mortgage bonds

A

collateral backed by a corporations real estate and physical assets

78
Q

equipment trust certificates

A

financing the acquisition of capital equipment used in the course of business; obligation to pay the investor is secured by equipment

79
Q

collateral trust bonds

A

depositing corporate securities into a trust to serve as a collateral for lenders

80
Q

types of unsecured debt

A

1: debentures
2: guaranteed bonds
3: income bonds
4: subordinated debt

81
Q

debentures

A

a debt obligation by the corporation backed only by its word and general creditworthiness; written contracts to pay principal on due date and interest on a regular basis

82
Q

guaranteed bonds

A

backed by a company other than the issuing corporation, such as a parent company; if the issuer defaults, the guarantee has to step in

83
Q

income bonds

A

adjustment bonds; used when a company is reorganizing and coming out of a bankruptcy

84
Q

if an investor is seeking income an ____ bond seems like the wrong investment

A

income

85
Q

subordinated debt

A

belonging to a lower or inferior class or rank; secondary; junior to

86
Q

no matter how subordinated a debenture is, its still

A

senior to any stockholder

87
Q

order of liquidation

A

1: secured debt holders
2: unsecured debt (debentures) and general creditors
3: subordinated debt
4: preferred stockholders
5: common stockholders

88
Q

administrative claim holders/ administrative claimants

A

attorneys, the courts, property appraisers, auctioneers, and liquidators

89
Q

administrative claim holders help assist in

A

liquidation; paid after secured debt but before unsecured debt

90
Q

benefits of owning debt securities

A

1: income
2: safety

91
Q

risks of owning debt securities

A

1: default
2: interest rate risk
3: purchasing power risk (inflation)

92
Q

debt securities have much less price volatility than

A

stocks

93
Q

the worst outcome of owning a bond is

A

defaulting

94
Q

the default risk in debt backed by the U.S. treasury is

A

effectively zero

95
Q

what are the safest investment for U.S. investors?

A

treasury backed securities

96
Q

purchasing power risk

A

inflation; as the price of things change overtime the fixed rate of a bond stays the same and doesn’t account for inflation

97
Q

municipal bonds

A

securities issued by state or local govt, U.S. territories and special districts for the purpose of public works and construction projects

98
Q

interest on most municipal bonds is

A

tax free on a federal level and tax free on a state level if the investor lives in the state of issuance

99
Q

two categories of municipal bonds

A

1: general obligation bonds
2: revenue bonds

100
Q

general obligation municipal bonds

A

issued for capital improvements that benefit the entire community; typically do not produce revenues

101
Q

principal and interest of general obligation municipal bonds are paid by

A

taxes collected by the municipal issuer

102
Q

general obligation bonds are known as full

A

faith and credit issues and are backed by the municipality’s taxing power

103
Q

the amount of debt a municipal govt may incur is

A

limited by state or local statutes to protect taxpayers from excessive taxes

104
Q

debt limits make bonds safe for

A

investors

105
Q

general obligation municipal bonds are often associated with requiring

A

voter approval

106
Q

revenue bonds

A

self-supporting debt; ; used to finance any municipal facility that generates sufficient income; principal and interest payments are made exclusively from revenues generated by the project or facility for which the debt was issued

107
Q

examples for revenue bonds

A

utilities, housing, transportation, education, health, industrial, sports

108
Q

authorities

A

issuer of revenue bonds from quasi-governmental entities tasked with building roads, tunnels, bridges, and other infrastructure

109
Q

the interest of bonds issued by a territory of the United States is

A

tax free to U.S. taxpayers

110
Q

short-term municipal obligations/ municipal anticipation notes

A

short-term securities that generate funds for a municipality that expects other revenues soon; less than 12 month maturities (3 months- 3 years max); repaid when the municipality receives the anticipated funds

111
Q

municipal notes categories

A

1: municipalities issue tax anticipation notes (TANs)
2: revenue anticipation notes (RANs)
3: tax and revenue anticipation notes (TRANs)
4: bond anticipation notes (BANs)
5: tax-exempt commercial paper
6: construction loan notes (CLNs)
7: variable rate demand notes
8: grant anticipation notes (GANs)

112
Q

municipal bonds

A

securities issued by state or local govt; lending money for the purpose of public works

113
Q

general obligation municipal bonds

A

bonds issued for capital improvements that benefit an entire community

114
Q

general obligation bonds do not producce

A

revenue

115
Q

revenue bonds

A

used to finance any municipal facility that generates sufficient income; utilities, housing, transportation, education, health, industrial, sport

116
Q

authorities of revenue bonds

A

quasi- govt entities tasked with building roads, tunnels, bridges, and other infrastructure

117
Q

the interest from bonds issued by or from U.S. territories are

A

tax free to U.S. taxpayers

118
Q

short-term municipal obligations

A

anticipation notes- are short-term securities that generate funds for a municipality that expects other revenues soon

119
Q

short-term municipal obligations are usually

A

less than 12 months maturity, although they may range from 3 months to 3 years

120
Q

short-term municipal obligations are repaid when

A

the municipality receives the anticipated funds

121
Q

tax anticipation notes

A

finance current operations in anticipation of future tax receipts; helps municipalities to even out cash flow between tax collection periods

122
Q

revenue anticipation notes

A

offered periodically to finance current operations in anticipation of future revenues from revenue-producing projects or facilities

123
Q

tax and revenue anticipation notes

A

combination of the characteristics of TANs and RANs

124
Q

bond anticipation notes

A

sold as interim financing that will eventually be converted to long-term funding through a sale of bonds

125
Q

construction loan notes

A

issued to provide interim financing for the construction of housing projects

126
Q

variable-rate demand notes

A

have fluctuating interest rates and are usually issued with a put option; the investor could periodically return the security to the issuer for its stated price

127
Q

grant anticipation notes

A

issued with the expectation of receiving grant money from the federal government

128
Q

the tax savings of a tax-free bond may be more attractive than a taxable bond with a higher interest rate if

A

the investor is in a higher tax bracket

129
Q

the higher the tax bracket

A

the greater the tax exemption’s value

130
Q

tax equivalent yield

A

determines a municipal bond investment’s tax benefit; divide the tax-free yield by 100% less the investor’s rate

131
Q

when calculating tax equivalent yield, the municipal yield will

A

always be less than the corporate yield

132
Q

tax equivalent yield calculation

A

municipal bond yield/ (100% - the investor’s tax bracket)

133
Q

tax-free equivalent yield

A

corporate yield x (100% - investor tax bracket %)

134
Q

treasury bills

A

direct short-term debt obligations of the U.S. govt; mature in 4, 13, 26 or 52 weeks; maturity is subject to change but always a year or less

135
Q

t - bills pay

A

no interest; rather issued at a discount from par value and mature at full par

136
Q

t-bills and STRIPS are the only treasury security

A

issued at a discount

137
Q

t-bills are the only treasury security issued

A

without a stated interest rate

138
Q

t-bills are highly

A

liquid

139
Q

13 week (90 day) t-bills are issued in market analysis as the stereotypical

A

risk-free investment

140
Q

treasury notes

A

direct debt obligations of the U.S. government that pay semi-annual interest as a percentage of the stated par value, and they mature at par value; intermediate maturities (2-10 years)

141
Q

treasury bonds

A

direct debt obligations of the U.S. government that pay semiannual interest as a percentage of the par and mature at par value; long-term maturities, greater than 10 years and up to 30

142
Q

treasury receipts

A

brokerage firms can create a type of bond known as a treasury receipt from U.S. treasury notes and bonds; not backed by full faith and credit of the U.S. treasury; BD yield more profits by separating coupon interest payments from the principal creates new securities with several maturity dates

143
Q

treasury STRIPS

A

treasury departments own version of receipts; designates certain issues as suitable for stripping into interest and principal components

144
Q

both treasury receipts and treasury STRIPS are

A

zero-coupon bonds

145
Q

treasury inflation protected securities (TIPS)

A

issued with maturities 5, 10, or 20 years; fixed coupon rate and pay interest every 6 months based on the inflation rate; interest payments will increase with inflation and decrease with deflation; final principal payment at maturity will have been adjusted for inflation over the term of the bond, the final principal payment will never be less than the original $1000 par

146
Q

farm credit systems

A

privately owned; a national network of lending institutions that provides agricultural financing and credit; govt sponsored enterprises that raise loanable funds by selling farm credit debt securities to investors

147
Q

the farm credit administration (FCA) is

A

a government agency that oversees the farm credit system

148
Q

government national mortgage association

A

GNMA or Ginnie Mae; govt owned corporation that supports the Department of Housing and Urban Development; backed by full faith and credit of the government; many have a stated 30 year life, GNMAs are typically sold based on average life expectancy

149
Q

prepayment risk

A

early payout; when a mortgage is paid off before its maturity date, the GNMA investor will receive back all outstanding principal of that loan at par

150
Q

federal home loan mortgage corporation

A

FHLMC or freddie mac; a public corporation; created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial institutions and packaging them into mortgage-backed securities for sale to investors

151
Q

federal national mortgage association

A

FNMA or fannie mae; publicly held corporation that provides mortgage capital; purchases conventional and insured mortgages from agencies such as federal housing administration and the veterans administration; backed by FNMAs general credit

152
Q

federal home loan mortgage corporation (freddie mac) and federal national mortgage association (fannie mae) are sometimes called

A

government - sponsored entities

153
Q

capital market

A

serves as a source of intermediate- term to long-term financing, usually in the form of equity or debt securities with maturities of more than 1 year

154
Q

money market

A

provides short-term funds to corporations, banks, broker dealers, government municipalities and the U.S. federal government

155
Q

money market instruments are

A

fixed- income (debt) securities with one year or less left to maturity; highly liquid; high degree of safety

156
Q

because money market instruments are short-term they have

A

little time to default

157
Q

investors who purchase money market securities generally do not receive

A

interest payments; instead they are issued at a discount and mature at face value

158
Q

certificate of deposit

A

type of money market security; bank issued and guaranteed with fixed income rates and minimum face values of $100,000 (jumbo CDs); although face values of $1 million or more are common; most mature in one year or less

159
Q

some certificate of deposits that can be traded in secondary markets are called

A

negotiable CDs

160
Q

only _____ are considered to be money market instruments

A

negotiable CDs

161
Q

a negotiable CD is

A

a bank’s version of an unsecured promissory note; bank’s promise to pay principal and interest is secured by no physical backing; secured by bank’s good faith and credit; sold at face value and pay interest at maturity

162
Q

retail CDs

A

difficult to transfer; (not liquid); often for specific amounts, and any minimum is set by the bank selling the CD

163
Q

bankers acceptance (BA)

A

a short-term time draft with a specified payment date drawn on a bank; post-dated check or line of credit

164
Q

the payment date of a BA (banker’s acceptance) is usually

A

between 1 and 270 days ( 9 months)

165
Q

corporations use BAs extensively to

A

finance international trade; BA typically pays for goods and services in a foreign country

166
Q

Commercial paper

A

prime paper; promissory notes; corporate issued; short-term, unsecured commercial paper to raise cash to finance accounts receivable and seasonal inventory gluts

167
Q

commerical paper maturities range from

A

1-270 days, although most mature within 90 days

168
Q

typically companies with excellent credit ratings issue

A

commercial paper

169
Q

U.S. treasury bills

A

direct short -term debt obligations of the U.S. govt; issued weekly with maturities of 4, 13, 26, and 52 weeks

170
Q

though t-notes and t-bonds are issued with longer maturities than t-bills, once the notes and bonds have only 1 year left to maturity,

A

they are considered money market instruments

171
Q

repurchase agreements

A

REPOs; a financial institution, such as a bank, raises cash by temporarily selling some of the assets it holds with an agreement to buy back the assets at a later date at a slightly higher price

172
Q

a repo is an agreement to

A

conduct a transaction (sale) and the to reverse the transaction (repurchase) in the future

173
Q

REPOS are often used by banks that

A

need to raise capital

174
Q

reverse repurchase agreement

A

reverse repo; a dealer agrees to buy securities from an investor and sell them back later at a higher price

175
Q

federal funds loans

A

any deposits in excess of the required amount of money it member banks must keep on reserve as mandated by the federal reserve board (FRB)

176
Q

federal funds can be loaned from one member bank to another for the purpose of

A

meeting the reserve requirement

177
Q

why would you place money market securities in a client’s portfolio?

A

1: highly liquid
2: very safe
3: good place to invest money that will be needed soon (short-term)

178
Q

money market securities rate of return is

A

quite low; not suitable for long-term investors

179
Q

collateralized mortgage obligations (CMO)

A

a type of asset-backed security; issued by private-sector financing corporations; pool a large number of mortgages, usually on single-family residences

180
Q

a pool of mortgages is structured into maturity classes called

A

tranches

181
Q

CMOs are often backed by

A

Ginnie Mae, Fannie Mae, and Freddie Mac; are historically rated high

182
Q

pooling the assets into financial instruments allowing them to be sold to general investors more easily than selling them individually is caleld

A

securitization

183
Q

securitization allows the risk of investing to be

A

diversified because each security will now only represent a fraction of the total value of underlying assets

184
Q

CMO pays principal and interest from the mortgage pool

A

monthly; however it repays principal to only 1 tranche at a time

185
Q

CMO principal payments are made in ____ increments to ______.

A

$1000; randomly selected bonds within the tranche

186
Q

collateralized debt obligations (CDO)

A

complex asset- backed securities; portfolios consist of non-mortgage loans or bonds; auto loans, leases, credit card debt, a company’s receivables

187
Q

collateralized debt obligations (CDOs) represent different types of

A

debts and credit risk

188
Q

different types of debt and risk categories are often called

A

tranches or slices

189
Q

the higher the risk associated with the tranche,

A

the more the CDO pays

SIE EXAM (2 decks)

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