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Series 65 > Unit 2 > Flashcards

Unit 2 Flashcards

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Series 65 flashcards
1
Q

WHO IS THE ISSUER OF A BOND?

A

ENTITY BORROWING MONEY (CORP, GOV)

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2
Q

PAR VALUE

A

FACE VALUE OF BOND, TYPICALLY $1,000

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3
Q

COUPON RATE

A

INTEREST RATE BOND PAYS ANNUALLY (AKA NOMINAL YIELD)
ALWAYS STATED IN ANNUAL PAYMENT (NEED TO DIVIDE FOR SEMIANNUAL)

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4
Q

MATURITY DATE

A

WHEN PRINCIPAL IS REPAID

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5
Q

CORPORATE BOND

A

ISSUED BY COMPANIES

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6
Q

TREASURY BOND

A

ISSUED BY US GOV

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7
Q

MUNICIPAL BOND

A

ISSUED BY STATE AND LOCAL GOV

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8
Q

FOREIGN BOND

A

ISSUED BY FOREIGN GOV AND COMPANIES

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9
Q

TYPES OF BONDS

A

CORPORATE, TREASURY, MUNICIPAL, FOREIGN

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10
Q

CURRENT YIELD OF BOND

A

EXPECTED ANNUAL RETURN OF A BOND =ANNUAL INTEREST PAYMENT (COUPON)/CURRENT MARKET PRICE

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11
Q

YIELD TO MATURITY

A

TOTAL RETURN IF HELD TO MATURITY

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12
Q

YIELD TO CALL

A

TOTAL RETURN IF BOND CALLED EARLY

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13
Q

DISCOUNT

A

BOND SELLS FOR LESS THAN PAR

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14
Q

PREMIUM

A

BOND SELLS FOR MORE THAN PAR

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15
Q

TYPES OF CORPORATE BONDS

A

SECURED & UNSECURED

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16
Q

SECURED BONDS

A

BACKED BY SPECIFIC ASSETS

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17
Q

UNSECURED BONDS

A

NOT BACKED BY SPECIFIC ASSETS (DEBENTURES)

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18
Q

TYPE OF TREASURY SECURITIES

A

TREASURY BILLS, TREASURY NOTES, TREASURY BONDS

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19
Q

TREASURY BILLS

A

SHORT TERM SECURITIES MATURING IN ONE YEAR OR LESS, ISSUED AT DISCOUNT, NO INTEREST PAYMENTS, MATURE AT PAR

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20
Q

TREASURY NOTES

A

MEDIUM TERM SECURITIES MATURING IN 2 TO 10 YEARS, PAY SEMIANNUAL INTEREST, MATURE AT PAR, NONCALLABLE

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21
Q

TREASURY BONDS

A

LONG TERM SECURITIES MATURING IN MORE THAN 10 YEARS, PAY SEMIANNUAL INTEREST, MATURE AT PAR, NONCALLABLE

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22
Q

TYPES OF MUNI BONDS

A

GENERAL OBLIGATION BONDS , REVENUE BONDS

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23
Q

GENERAL OBLIGATION BONDS

A

BACKED BY ISSUERS FULL FAITH AND CREDIT, SECURED BY UNLIMITED PROPERTY TAXES, VERY SAFE

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24
Q

REVENUE BONDS

A

Backed by the revenue from a specific project or source. YIELD IS HIGHER (TAXES ARE MORE SECURE THAN REVENUE)

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25
Q

TAX BENEFITS OF MUNI BONDS

A

INTEREST IS EXEMPT FROM FEDERAL INCOME TAX

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26
Q

RISKS OF FOREIGN DEBT SECURITIES

A

CURRENCY RISK, POLITICAL RISK, ECONOMIC RISK

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27
Q

CURRENCY RISK

A

FLUCTUATIONS IN EXCHANGE RATE

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28
Q

POLITICAL RISK

A

Changes in government or political instability.

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29
Q

ECONOMIC RISK

A

Economic instability in the issuing country.

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30
Q

METHODS OF REPAYING A BOND

A

SINKING FUND, SERIAL BOND, BALLOON PAYMENT

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31
Q

SINKING FUND

A

FUNDS SET ASIDE TO REPAY DEBT OR BOND

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32
Q

SERIAL BOND

A

BONDS ISSUED WITH DIFFERENT MATURITY DATES

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33
Q

BALLOON PAYMENT

A

LARGE PAYMENT DUE AT END OF BOND’S TERM

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34
Q

COMMERICIAL PAPER

A

MONEY MARKET: Short-term unsecured promissory notes issued by companies.

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35
Q

CERTIFICATE OF DEPOSIT

A

MONEY MARKET: Time deposits with banks.

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36
Q

TREASURY BILLS

A

MONEY MARKET: Short-term government securities. DO NOT PAY INTEREST, SOLD AT DISCOUNT FROM PAR

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37
Q

CAN THE GOV (US OR STATE) ISSUE STOCK?

A

NO, THEY CAN ONLY ISSUE DEBT SECURITIES

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38
Q

BOND’S INDENTURE

A

STATES THE TERMS OF THE LOAN, AKA DEED OF TRUST

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39
Q

WHAT IS LONG TERM DEBT?

A

DEBT ISSUED FOR MORE THAN 5 YEARS

40
Q

WHAT HAPPENS TO BONDS WHEN INTEREST RATES GO UP?

A

BOND PRICES GO DOWN AND VICE VERSA. KNOWN AS INTEREST RATE RISK

41
Q

DO BOND INTEREST RATE PAYMENTS FLUCTUATE WITH THE PRICE OF BONDS?

A

NO, INTEREST RATES WILL STAY THE SAME

42
Q

HOW FREQUENT IS INTEREST PAID ON BONDS?

A

GENERALLY SEMIANNUALLY

43
Q

IS INTEREST ON BONDS AN OBLIGATION?

A

YES, COULD LEAD TO FORCLOSURE IF UNPAID

44
Q

HOW DO MONEY MARKET BONDS WORK?

A

THEY ARE ISSUED AT A DISCOUNT WITH DIFFERENCE PAID AT MATURITY, REPRESENTING INTEREST

45
Q

HOW IS INTEREST PAID ON A BOND IF IT IS SOLD BEFORE NEXT INTEREST PAYMENT?

A

BUYER PAYS SELLER INTEREST THAT HAS ACCRUED TO DATE AND THEN RECEIVES THE FULL PAYMENT

46
Q

TWO PRIMARY RATING ORGANIZATIONS FOR BONDS

A

STANDARD & POORS(AAA, AA A, BBB) MOODY’S (Aaa, Aa, A, Baa)

47
Q

INVESTMENT GRADE BONDS

A

TOP RATED BONDS (BBB OR Baa or higher). ONLY BONDS ELIGIBLE TO PURCHASE BY INSTITUTIONS (BANKS, INSURANCE COMPANIES) AND FIDUCIARIES

48
Q

HIGH YIELD BONDS

A

AKA JUNK BONDS, LOWER GRADE, HIGH RISK COULD LEAD TO HIGH RETURN

49
Q

WHAT DOES IT MEAN TO BE SPECULATIVE?

A

HIGH RISK OF LOSS

50
Q

PRICING OF CORPORATE AND MUNI BONDS

A

QUOTED AS A PERCENTAGE OF PAR
EACH BOND POINT IS $10 (1% OF $1,000)

51
Q

WHAT IS THE PRICE OF A CORP OR MUNI BOND QUOTED AT:
90 1/4
101 /4

A

901,000 = 900 1/4$10= 2.50 $902.50
1011,000=1010 3.410=7.50 $1017.50

52
Q

PRICING OF A TREASURY BOND

90.8 OR 90.08
101.24

A

QUOTED AS A PERCENTAGE OF PAR

901,000=900 8/3210= 2.50 902.50
1011000=1010 24/3210=7.50 1017.50

53
Q

WHAT DOES DEF 5s35 @106 MEAN?

A

DEF IS ISSUE
5 IS COUPON/NOMINAL RATE
35 IS MATURITY DATE (2035)
106 IS PRICE (1060)

54
Q

CONVERTIBLE DEBT

50:1

CONVERSION PRICE OF 20

A

DEBENTURE
ISSUED BY CORPORATIONS ONLY
CONVERTED OR EXCHANGED FOR COMMON STOCK AT THE CONVERSION PRICE

MEANS 50 SHARES FOR 1 BOND

1,000/20 = 50 SHARES

55
Q

BONDS ARE ALWAYS REPRESENTED IN INCREMENTS OF WHAT DOLLAR AMOUNT?

A

$1,000

56
Q

PARITY

A

CONVERSION PRICE AND BOND PRICE ARE THE SAME

57
Q

PAR VALUE

A

DOLLAR AMOUNT RETURNED TO INVESTOR AT MATURITY

58
Q

THE YTM ON A DISCOUNT BOND WILL BE HIGHER OR LOWER THAN BONDS CURRENT YIELD?

A

HIGHER. REVERSE IT TRUE

59
Q

BUYING A BOND AT A DISCOUNT WILL RESULT IN GETTING BACK?

A

PAR RESULTING IN A PROFIT

60
Q

BUYING A BOND AT A PREMIUM WILL RESULT IN GETTING BACK

A

PAR RESULTING IN A LOSS

61
Q

IF A BOND IS SELLING AT A PREMIUM, WHAT IS THE RELATIONSHIP OF CY, YTM, YTC, AND NOMINAL

A

YTC
YTM
CY
NOMINAL

62
Q

IF A BOND IS SELLING AT A DISCOUNT, WHAT IS THE RELATIONSHIP OF CY, YTM, YTC, AND NOMINAL

A

NOMINAL
CY
YTM
YTC

63
Q

CALCULATE CURRENT YIELD OF COMMON STOCK

A

DIVIDEND DIVIDED BY STOCK PRICE

64
Q

WHAT MARKET DO GOV BONDS USUALLY TRADE?

A

CAPITAL MARKET SOME TRADE IN MONEY MARKET

65
Q

WHAT BONDS ARE THE SAFEST

A

US GOV BONDS

66
Q

TREASURY INFLATION-PROTECTED SECURITIES (TIPS)

A

ISSUED WITH A FIXED INTEREST RATE BUT PRINCIPAL IS ADJUSTED SEMIANUALLY BY AMOUNT EQUAL TO CONSUMER PRICE INDEX (=FIXED INTEREST*ADJUSTED PRINCIPAL), SOLD IN DENOMINTIONS OF $100. ONLY FED TAXED, ADDS PROTECTION FROM PURCHASING POWER RISK

67
Q

WHAT IS THE STANDARD MEASUREMENT OF INFLATION?

A

CONSUMER PRICE INDEX

68
Q

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (GINNIE MAES)

A

MORTGAGE BACKED SECURITY BACKED BY FEDERAL GOV. FHA AND VA GUARANTEED MORTGAGES. INTEREST PAID MONTHLY

69
Q

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)(FANNIE MAE)

A

MORTGAGE BACKED SECURITY QUASI GOV ORGANIZATION. NOT BACKED BY GOV BUT A “MORGAL” OBLIGATION OF GOV. FHA AND VA MORTGAGES

70
Q

PREPAYMENT RISK

A

RISK TO GNMA AND FNMA OF MORTGAGES BEING PAID OFF EARLY. FORM OF REINVESTMENT RISK

71
Q

ADVANTAGES AND DISADVANTAGES OF MORTGAGE BACKED SECURITES

A

ADVANTAGE: HIGHER RETURN

DISADVANTAGE: DIFFICULT TO UNDERSTAND, PREPAYMENT RISK, DEFAULT RISK, REINVEMENT RISK, LIQUIDITY RISK

72
Q

TENESSEE VALLEY AUTHORITY (TVA)

A

LARGEST PUBLIC POWER PROVIDER, CORP OF US GOV, BACKED BY GENERATED REVENUE, “IMPLICIT” BACKED BY GOV

73
Q

SECURED DEBT

MORTGAGE BONDS
EQUIPMENT TRUST CERTIFICATES
COLLATERAL TRUST CERTIFICATES

A

BACKED BY ASSETS

-BACKED BY REAL ESTATE/ASSETS OF CORPORATION (IE:MORTGAGE)
-BACKED BY ASSETS (IE:CAR LOAN)
-CORP DEPOSITS SECUITIES IT OWNS INTO A TRUST AS COLLATERAL

74
Q

UNSECURED DEBT

DEBENTURE
GUARANTEED BOND
SUBORDINATED

A

BACKED ONLY BY WORD AND CREDITWORTHINESS

-WRITTEN PROMISE, IOU
-GUARANTEE GIVEN BY A CORP ENTITY OTHER THAN ISSUER
- LOWER OR INFERIOR CLASS TO OTHER CREDITORS

75
Q

CAPITAL STRUCTURE OF A CORPORATION

A

SECURED CREDITOR
UNSECURED CREDITOR
SUBORDINATED DEBT HOLDER
PREFERRED STOCKHOLDER
COMMON STOCKHOLDER

76
Q

TAXES OF CORPORATE BONDS
VS
TAXES OF GOV BONDS
VS
TAXES OF MUNI

A

CORPORATE TAXES AS ORDINARY INCOME ON BOTH STATE AND FED

TREASURY DEBT TAXES AT FEDERAL LEVEL

MUNI FREE FROM FEDERAL AND STATE IF INVESTOR RESIDES IN SAME STATE AS ISSUER

77
Q

TAX EQUIVALENT YIELD (TEY)

A

=MUNI BOND COUPON
DIVIDED BY (100%-INVESTOR’S TAX BRACKET)

78
Q

ADVANTAGES AND DISADVANTAGES OF FROEIGN BONDS

A

ADVANTAGE: POTENTIAL HIGHER RETURNS, DIVERISIFIATION, HEDGE AGAINST VALUE OF US DOLLAR DROP

RISK: CURRENCY RISK, HIGHER RISK OF DEFAULT, LESS LIQUIDITY, HIGHER TRADING COSTS

79
Q

EUROBOND

A

LONG TERM DEBT ISSUED AND SOLD OUTSIDE THE COUNTRY OF THE CURRENTY IN WHICH IT IS DENOMINATED. PAYS IN FOREIGN CURRENCY. DO NOT HAVE TO REGISTER WITH SEC.

80
Q

EURODOLLAR

A

BOND ISSUED AND SOLD OUTSIDE OF US BUT PRINCIPAL AND INTEREST ARE STATED IN US DOLLARS. PAYS IN US CURRENCY

81
Q

YANKEE BOND

A

US DOLLAR DENOMINATED BOND ISSUED BY NON US ENTITY IN US MARKET

82
Q

ADVANTAGES AND DISADVANTES OF EUROBONDS

A

ADVANTAGES: NO CURRENCY RISK, RATED BY US AGENCIES, HIGHER YIELDS

RISKS: LACK OF TRANSPARENCY, POLITICAL AND COUNTRY RISK, LESS LIQUIDITY, CURRENCY RISK IF DENOMINATED IN A CURRENCY OTHER THAN YOUR OWN

83
Q

BRADY BONDS

A

EXCHANGE DEFAULTED BANK LOANS IN LESS DEVELOPED COUNTRIES WITH A SECURITY THAT COULD BE CARRIED ON THE BANK’S BOOKS AS A PERFORING ASSET, 10-30 YEARS. NOT GUARANTEED BY GOV

84
Q

ZERO COUPON BONDS

A

NOMINAL/COUPON RATE IS 0
ISSUED AT SUBSTANTIAL DISCOUNT FROM PAR
PAY NO INTEREST
MATURE AT PAR
TAXES PAID ON PHANTOM INCOME
ALLOWS INVESTORS TO LOCK IN YIELD

85
Q

RISK OF ZERO COUPON BOND

A

CREDIT RISK IF ISSUER BECOMES INSOLVENT AT TIME OF BOND MATURITY

86
Q

SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF SECURITIES (STRIPS)

A

ZERO COUPON TREASURIES
NO CREDIT RISK EXISTS

87
Q

CALLABLE BONDS

A

ISSUER CAN PAY OFF BONDS BEFORE MATURITY, IF THEY DESIRE
USUALLY WHEN INTEREST RATES DECLINE

88
Q

CALL PROTECTION

A

NUMB ERO FYEARS BEFORE ISSUER MAY EXERCISE CALL PROVISION

89
Q

CONVERTIBLE BOND

A

CAN BE CONVERTED TO COMMON STOCK WHEN STOCK PRICE INCREASES ABOVE CONVERSION PRICE. LOWER INTEREST RATE

90
Q

ADVANTAGES AND RISKS OF CONVERTIBLE BOND

A

ADVANTAGES: DOWNSIDE PROTECTION (WILL SELL ON BASIS OF YIELD ALONE IF STOCK PRICE DOES NOT INCREASE)

UPSIDE POTENTIAL (HAS ALL THE UPSIDE POTENTIAL OF COMMONSTOCK)

RISKS: ANTIDILUTIVE PROTECTION (IF COMPANY DOES A STOCK SPLIT, SHARES ARE WORTH HALF)

91
Q

MONEY MARKET

A

MARKET FOR BUYING AND SELLING SHORT TERM LOANABLE FUNDS IN THE FORM OF SECURITIES AND LOANS.
BUYER IS LENDER, SELLER BORROWING MONEY.
1 YEAR OR LESS.
ISSUED AT DISCOUNT. DO NOT PAY INTEREST.
PAID BACK AT PAR.

92
Q

CD

A

UNSECURED TIME DEPOSIT
DO NOT HAVE PREPAYMENT PENALTY
FDIC INSURED TO $250K
JUMBO CD’S (UNSECURED) PAY INTEREST SEMIANNUALLY
MONEY MARKET ISSUED AT PAR (NOT DISCOUNT)

93
Q

COMMERCIAL PAPER

A

SHORT TERM UNSECURED PAPER ISSUED BY CORPORATIONS TO RAISE WORKING CAPITAL.
EXEMPT FROM REGISTRATION IF NO LONGER THAN 270 DAYS.
ISSUED AT DISCOUNT

94
Q

WHAT DOES “EURO” MEAN?

A

BANK DEPOSIT MADE OUTSIDE OF CURRENCY’S HOME COUNTRY

INTEREST RATE BASED ON LIBOR

95
Q

WHAT IS THE WORLD’S MOST WIDELY USED BENCHMARK FOR SHORT TERM INTEREST RATES?

A

LIBOR

96
Q

ADVANTAGES AND DISADVANTAGES OF MONEY MARKET

A

ADVANTAGES: HIGH LIQUIDITY, VERY SAFE, BEST PLACE TO STORE IF NEEDED SOON

RISK: LOW RETURN, FLUCTUATING INCOME DUE TO SHORT TERM MATURITIES

97
Q

DEMAND DEPOSIT (DDA)

A

CASH IN THE BANK

SHORT TERM FUNDS WITH LOW RETURN

Series 65 (3 decks)

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