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Series 7 - Self Study > Unit 2 - Debt Securities > Flashcards

Unit 2 - Debt Securities Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Define funded debt

A

corp bonds with 5+ years

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2
Q

Define a term bond

A

principal of whole issue matures at once.

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3
Q

Define a serial maturity bond

A

schedules portions of the principal to mature at intervals over a period of years until balance is repaid

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4
Q

Define a balloon maturity bond

A

elements of serial and term maturities. Issuer repays part of principal before final maturity but majority s at end

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5
Q

Define series issues bonds

A

when an issuer spreads out the bonds over a period of time

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6
Q

Define principal-only registered bonds

A

owners name is on the certificate, but coupons are in bearer form, meaning that anyone can have ownership/it is not recorded

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7
Q

Define book-entry bonds

A

Owners do not receive certificates and transfer agent keeps ownership record (different from registered bond owner)

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8
Q

example of book-entry bond

A

U.S. government bonds (usually)

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9
Q

define debt service

A

“the schedule of interest and principal payments due on a bond”

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10
Q

define a sinking fund

A

used to call bonds, or redeem at maturity or buy back in the market

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11
Q

define tendering a bond

A

when the issue’s trust indenture does not include a call provision - issuer buys bonds in open market, aka tendering

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12
Q

how are serial bonds called normally?

A

called in inverse order of maturities (b/c calling longer bonds reduces issuer’s interest expense)

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13
Q

define refunding a bond

A

refunding is practice of raising money to call a bond. “issuer sells new bond issue to generate funds to retire an existing issue”

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14
Q

define pre-refunded bond

A

“new issue is sold at lower coupon before original bond issue can be called.” this helps issuer to lock in a favorable int. rate

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15
Q

define defeasane

A

termination of the issuer’s obligation - therefore pre-refunded bonds are considered terminated and are not considered part of issuer’s debt

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16
Q

what does a putable bond protect the holder from?

A

market interest rate risk - because the bonds will not trade much below the put price, aka the par value

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17
Q

define a YTC (yield to call_ bond

A

bond with call feature prior to maturity

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18
Q

When a YTC bond is trading at a premium & called at par, are the nominal, current and YTM higher or lower than the YTC?

A

always lower.

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19
Q

For a bond selling at discount, what are yields ranked from high to low (Nominal, CY, YTC, YTM)

A

for bond selling at discount, highest to lowest is YTC, YTM, CY, Nominal

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20
Q

define a secured bond

A

type of corporate bond. “when issuer has identified specific assets as collateral for interest & principal payments”

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21
Q

example of a secured bond

A

mortgage bonds, collateral trust bonds, equipment trust certificates (ETCs)

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22
Q

define a collateral trust bond

A

“issued by corporations that own securities of other companies as investments”

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23
Q

define unsecured bonds

A

bonds that have “no specific collateral backing”

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24
Q

examples of unsecured bonds

A

debentures or subordinated debentures

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25
Q

define debentrues

A

“backed by general credit of issuing corporation.” “below secured bonds but above subordinated debentures, pfd & common stock”

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26
Q

can subordinated debentures have conversion features?

A

yes

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27
Q

do subordinated debentures usually offer higher or lower yields than straight debentures or secured bonds?

A

higher

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28
Q

List hierarchy of claims if company goes bankrupt

A
  1. unpaid wages
  2. IRS (taxes)
  3. Secured debt
  4. unsecured liabilities/general creditors
  5. subordinated debt
  6. pfd stockholders
  7. common stockholders
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29
Q

define guaranteed bond

A

bond backed by a company as well as the issuer

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30
Q

define income bonds / adjustment bonds

A

“used for company reorganization / coming out of bankruptcy. only pay interest if corp has enough income to meet interest payment & if BOD declares a payment

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31
Q

zero coupon bonds - prices fluctuate for shorter or longer term bonds?

A

longer term maturities of zero cpn bonds fluctuate more

32
Q

what is the Trust Indenture Act of 1939?

A

“requires corporate bond issues of $50 mill or more sold interstate to be issued under a trust indenture”

33
Q

who is the trustee for the Trust Indenture Act of 1939?

A

trustee represents the bond holders & therefore the trustee is usually a commercial bank or trust company for bonds

34
Q

Who is exempt from the rust Indenture Act of 1939?

A

Federal & municipal goverments

35
Q

Formula for conversation rate

A

par $ / conversation price $ = conversation ratio aka # of shares

36
Q

Formula to calculate parity prices of convertible securities and their underlying common shares

A

market price of bond / conversation ration (# of shares)
or
market price of common x conversion ratio

37
Q

rank from high to low yields: agency, gov’t and corp

A

corp, agency, federal

38
Q

how are agency issues taxed?

A

gov’t agency issues back by mortgages are taxed on fed, state & local. Others are generally only taxed at fed level

39
Q

are MBS susceptible to reinvestment risk?

A

yes b/c when int rate decline, mortgages are refinanced & mortgage will be paid back sooner –> principal prepayment from bond

40
Q

Difference between PC and GMC (mortgage participation certificate & guaranteed mortgage certificate)

A

“PCs make principal & interest pymts once a month; GMCs make int. pymt 2x a year & principal pymt once a year

41
Q

how are FHLMC securities taxed? (Federal Home Loan Mortgage Corporation)

A

“subject to federal, state & local income taxes”

42
Q

what is GNMA?

A

Gov’t National Mortgage Association, aka Ginnie Mae. It is gov’t owned corporation back in full by US gov’t

43
Q

What do GNMA securities feature?

A
  1. $1,000 mins
  2. Monthly int & principal payment
  3. taxed at all levels
  4. pass-through certif
  5. significant reinvest risk
44
Q

What securities does Sallie Mae offer?

A

offers discount notes & short term floating rates

45
Q

what are features of securities from Sallie Mae?

A

Floaters have 6mo maturities

46
Q

how are Sallie Mae securities taxed?

A

interest is taxed at federal level, but exempt from most states.

47
Q

Define competitive bid during Treasury auction

A

bids placed by primary dealers in U.S. gov’t securities (ex. HSBC, BofA, JPM)

48
Q

Define noncompetitive bid during Treasury auction

A

bids placed by smaller banks, broker/dealers, insurance companies, individuals

49
Q

which bids are always filled - noncompetitive or competitive?

A

noncompetitive

50
Q

define dated date

A

“date which interest accrual begins”

51
Q

What is calculation for accrued interest on corp and muni bonds?

A

calculated in 360-day year of 30-day months. princ x interest x elapsed days / 360 days

52
Q

what is calculation of accrued interest for govt bond?

A

based on 365-day year, 30-day month

53
Q

Define trading flat

A

describes situation when bond trades without accrued interest (eg. zero coupon bonds)

54
Q

What information is gathered from the PSA (Public Securities Association)?

A

“CMO’s yld & maturity estimates based on historical data projections of mortgage prepayments”

55
Q

What are the classes/types of CMOs

A

principal only, interest only, planned amort class, targeted amort class

56
Q

Do PO CMOs (princ only) trade a premium or discount?

A

trade at discount & all principal is repayed, which makes up the total return (includes prepayments)

57
Q

Does value of PO CMOs increase or decrease with interest rate changes?

A

inverse relationship- PO up when interest rates fall & prepayments accelerate

58
Q

Do IO CMOs (interest only) sell at prem or discount?

A

discount, and cash flow declines overtime

59
Q

Does value of IO CMOs increase or decrease with interest rate changes?

A

move together - IOs increase with interest rate increase

60
Q

What is affect on IO CMOs when prepayment rates are high?

A

IO CMO owners may receive fewer interest rate pymts

61
Q

What are planned amort class CMOs (PACs)?

A

targeted maturity dates, retired first- provides protection from prepayment risk & extension risk (extension risk- prin. pymts slower than expected)

62
Q

Define Targeted Amort. Class CMO (TAC)

A

“transfers prepayment risk only to a companion tranche and does not offer protection from extension risk). get larger int. rate for taking on the risk

63
Q

Describe zero tranche CMO

A

Z-tranche receives no pymt until all tranches are retired - most volatile

64
Q

What are the CMO risks?

A
  1. “rate if principal repayment varies”
  2. If int. rates go down- prepayment risk
  3. int rates up- extended maturity risk
65
Q

How are CMOs usually taxed?

A

federal, state and local

66
Q

What denominations are CMOs usually in?

A

$1,000 denominations

67
Q

Rank yield level from high to low for PAC and TAC

A

TAC, PAC (PACs usually have lower yields than TACs)

68
Q

define repo agreement

A

financial institution raises cash by temporarily selling some securities with agreement to buy them back.

69
Q

if a dealer defaults on a repo agreement, can the lender sell the securities in the second market?

A

yes

70
Q

what is the biggest type if investment risk in a repo agreement?

A

interest rate risk because value of the bonds can decrease and if repo seller defaults, the lender wld sell in secondary mkt for less

71
Q

define banker’s acceptance (BA)

A

“short-term draft with specified payment date drawn on the bank- like a postdated check or LOC”

72
Q

What are banker’s acceptances (BAs) used for?

A

typically for int’l trade

73
Q

Federal funds rate vs prime rate

A

fed fund rate “is rate commercial money center banks charge each other for overnight loans of $1mill or more” vs prime rate is “int rate large US $ center baks charge corporate borrowers for unsecured loans. Each bank sets its own prime rate

74
Q

define the discount rate

A

“rate Fed Reserve charges for short term loans to member banks” “also indicates direction of FRB (fin. reserv. board) monetary policy- rate down is easing”

75
Q

Define Fed funds rate

A

interest rate charged on reserves of $1 mill or more. not set by fed reserve but is average if selected money center banks in country

76
Q

What is the most sensitive/volatile short-term interest rate?

A

Fed Funds rate

77
Q

define a debenture

A

Unsecured corporate debt

Series 7 - Self Study (10 decks)

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