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

Unit 2 - Debt Securities 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
define debentrues
"backed by general credit of issuing corporation." "below secured bonds but above subordinated debentures, pfd & common stock"
26
can subordinated debentures have conversion features?
yes
27
do subordinated debentures usually offer higher or lower yields than straight debentures or secured bonds?
higher
28
List hierarchy of claims if company goes bankrupt
1. unpaid wages 2. IRS (taxes) 3. Secured debt 4. unsecured liabilities/general creditors 5. subordinated debt 6. pfd stockholders 7. common stockholders
29
define guaranteed bond
bond backed by a company as well as the issuer
30
define income bonds / adjustment bonds
"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
31
zero coupon bonds - prices fluctuate for shorter or longer term bonds?
longer term maturities of zero cpn bonds fluctuate more
32
what is the Trust Indenture Act of 1939?
"requires corporate bond issues of $50 mill or more sold interstate to be issued under a trust indenture"
33
who is the trustee for the Trust Indenture Act of 1939?
trustee represents the bond holders & therefore the trustee is usually a commercial bank or trust company for bonds
34
Who is exempt from the rust Indenture Act of 1939?
Federal & municipal goverments
35
Formula for conversation rate
par $ / conversation price $ = conversation ratio aka # of shares
36
Formula to calculate parity prices of convertible securities and their underlying common shares
market price of bond / conversation ration (# of shares) or market price of common x conversion ratio
37
rank from high to low yields: agency, gov't and corp
corp, agency, federal
38
how are agency issues taxed?
gov't agency issues back by mortgages are taxed on fed, state & local. Others are generally only taxed at fed level
39
are MBS susceptible to reinvestment risk?
yes b/c when int rate decline, mortgages are refinanced & mortgage will be paid back sooner --> principal prepayment from bond
40
Difference between PC and GMC (mortgage participation certificate & guaranteed mortgage certificate)
"PCs make principal & interest pymts once a month; GMCs make int. pymt 2x a year & principal pymt once a year
41
how are FHLMC securities taxed? (Federal Home Loan Mortgage Corporation)
"subject to federal, state & local income taxes"
42
what is GNMA?
Gov't National Mortgage Association, aka Ginnie Mae. It is gov't owned corporation back in full by US gov't
43
What do GNMA securities feature?
1. $1,000 mins 2. Monthly int & principal payment 3. taxed at all levels 4. pass-through certif 5. significant reinvest risk
44
What securities does Sallie Mae offer?
offers discount notes & short term floating rates
45
what are features of securities from Sallie Mae?
Floaters have 6mo maturities
46
how are Sallie Mae securities taxed?
interest is taxed at federal level, but exempt from most states.
47
Define competitive bid during Treasury auction
bids placed by primary dealers in U.S. gov't securities (ex. HSBC, BofA, JPM)
48
Define noncompetitive bid during Treasury auction
bids placed by smaller banks, broker/dealers, insurance companies, individuals
49
which bids are always filled - noncompetitive or competitive?
noncompetitive
50
define dated date
"date which interest accrual begins"
51
What is calculation for accrued interest on corp and muni bonds?
calculated in 360-day year of 30-day months. princ x interest x elapsed days / 360 days
52
what is calculation of accrued interest for govt bond?
based on 365-day year, 30-day month
53
Define trading flat
describes situation when bond trades without accrued interest (eg. zero coupon bonds)
54
What information is gathered from the PSA (Public Securities Association)?
"CMO's yld & maturity estimates based on historical data projections of mortgage prepayments"
55
What are the classes/types of CMOs
principal only, interest only, planned amort class, targeted amort class
56
Do PO CMOs (princ only) trade a premium or discount?
trade at discount & all principal is repayed, which makes up the total return (includes prepayments)
57
Does value of PO CMOs increase or decrease with interest rate changes?
inverse relationship- PO up when interest rates fall & prepayments accelerate
58
Do IO CMOs (interest only) sell at prem or discount?
discount, and cash flow declines overtime
59
Does value of IO CMOs increase or decrease with interest rate changes?
move together - IOs increase with interest rate increase
60
What is affect on IO CMOs when prepayment rates are high?
IO CMO owners may receive fewer interest rate pymts
61
What are planned amort class CMOs (PACs)?
targeted maturity dates, retired first- provides protection from prepayment risk & extension risk (extension risk- prin. pymts slower than expected)
62
Define Targeted Amort. Class CMO (TAC)
"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
Describe zero tranche CMO
Z-tranche receives no pymt until all tranches are retired - most volatile
64
What are the CMO risks?
1. "rate if principal repayment varies" 2. If int. rates go down- prepayment risk 3. int rates up- extended maturity risk
65
How are CMOs usually taxed?
federal, state and local
66
What denominations are CMOs usually in?
$1,000 denominations
67
Rank yield level from high to low for PAC and TAC
TAC, PAC (PACs usually have lower yields than TACs)
68
define repo agreement
financial institution raises cash by temporarily selling some securities with agreement to buy them back.
69
if a dealer defaults on a repo agreement, can the lender sell the securities in the second market?
yes
70
what is the biggest type if investment risk in a repo agreement?
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
define banker's acceptance (BA)
"short-term draft with specified payment date drawn on the bank- like a postdated check or LOC"
72
What are banker's acceptances (BAs) used for?
typically for int'l trade
73
Federal funds rate vs prime rate
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
define the discount rate
"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
Define Fed funds rate
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
What is the most sensitive/volatile short-term interest rate?
Fed Funds rate
77
define a debenture
Unsecured corporate debt

Series 7 - Self Study (10 decks)

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