Unit 2: Types and Characteristics of Fixed Income Securities

Question 1

S&P Investment Grade

Answer 1

AAA, AA, A, BBB (All CAPS)

Question 2

Moody Investment Grade

Answer 2

Aaa, Aa, A, Baa (lower case a)

Question 3

Investment grade liquidity

Answer 3

IG bonds have highly liquidity
junk bonds have higher yields

Question 4

Corp/Muni Bond price display

Answer 4

1/8s = $1.25
Ex, 90 1/8 = 901.25

Question 5

Treasury Security Pricing

Answer 5

.1 = 1/32 of $10
90.8 (or 90.08) = 900+8/32 = 902.50
Format = 900.1 to 900.31

Question 6

Convertible Bonds

Answer 6

Fixed an indenture.
Conversion price to par value
Stock will trade equivalent % higher or lower

Question 7

Different Types of Treasuries

Answer 7

T-Bills= 4-52 weeks, issued at discount
T-Notes= 2,3,5,7,10 years
T-Bonds=10-30 years

Question 8

TIPS

Answer 8

fixed rate, but principal adjusts with inflation
-the principal adjustment is taxable

Question 9

GNMA

Answer 9

full faith and credit of govt, passthrough

Question 10

FNMA

Answer 10

does not have full faith and credit, but also passthrough

Question 11

MBS risks

Answer 11

prepayment/reinvestment risk

Question 12

Tennessee Valley authority

Answer 12

not officially backed, next to risk free

Question 13

Liquidation priority

Answer 13

Secured creditor
Unsecured creditor
Subordinated debt
preferred shareholder
common shareholder

Question 14

Tax Equivalent Yield

Answer 14

Muni Coupon/(100-tax rate)

Question 15

Eurobonds

Answer 15

pay in foreign currency

Question 16

Eurodollar bonds

Answer 16

US issues with non US issuers that pay in US dollars
-no currency risk, but some transparency risk, rated, potential higher yield

Question 17

Yankee Bond

Answer 17

US dollar denominated bond issued by non-US entity in US market

Question 18

Brady bonds

Answer 18

foreign bonds, asset backed, dollar denominated. NOT US govt backed. can use any security to pledge, but usually zero coupon treasury

Question 19

Zero Coupon Bond

Answer 19

Issued at discount, has phantom tax, volatile. lower yield = more volatility?

Question 20

Callable bonds are usually called when

Answer 20

rates fall

Question 21

Convertibles

Answer 21

either bond to stock, or stock to bond, can have anti-dilutive feature

Question 22

Money markets

Answer 22

under 1 yr maturity
Jumbo CDs, 100K+, tradeable, FDIC up to $250K, no prepayment principal

Question 23

Secured Overnight Financing Rate (SOFR)

Answer 23

the new LIBOR

Question 24

Demand Account

Answer 24

another name for regular checking account

Question 25

If inflation rises then, interest rates

Answer 25

rise

Question 26

Transactions with accrued interest

Answer 26

buyer pays sellers portion in transaction, then is reimbursed through interest payment

Question 27

Most beneficial call price to issuer is the

Answer 27

lowest one

Question 28

Muni General Obligation is less risky than

Answer 28

Muni Revenue bond

Question 29

Convertible bonds have lower current yield since

Answer 29

they have option to convert to stock

Question 30

Divide bond’s conversion price by

Answer 30

$1000, to get number of shares.