Section II.C. Fixed Income

Question 1

Sovereign debt

Answer 1

• Bonds issued by a foreign government in their own currency
• Subject to credit, political, and currency risk in addition interest rate risk

Question 2

U.S. Treasury bonds

Answer 2

• Bonds and notes may be purchased directly from the Treasury
• Note maturity is 1-10 years; bond maturity is 10-30 years
• Denominations can be as small as $100, but $1,000 is more common
• Bid price of 100:08 means 100 8/32 or $1002.50

Question 3

Emerging market debt

Answer 3

• Debt issued by emerging market governments
• Markets with some form of market exchange and liquidity in its financial markets
• These markets are not however as advanced as developed markets
• Emerging markets are not considered as efficient as developed markets, nor do they have comparable accounting or legal standards
• Examples include China, Brazil, India, and Russia

Question 4

Municipal bond

Answer 4

• A debt obligation issued by a state l, county, or municipality
• Muni-bonds are exempt from federal taxation and from most state and local taxes (depending on the type of bond)
• There are different types of muni-bonds including general obligation bonds and revenue bonds

Question 5

Mortgage-backed security (MBS)

Answer 5

• Pooled and packaged asset backed securities where mortgages are the underlying asset
• Investors receive the principal and interest payments
• Must be pooled together so that they are given an acceptable rating (i.e., top two ratings by an accredited ratings agency)
• Also called “mortgage pass-throughs”

Question 6

Corporate bond

Answer 6

• A debt obligation, which is a legal commitment to repay an amount borrowed and any promised interest over a defined period of time
• Issued by a corporate entity
• Classified as AAA or high-yield (junk)
• Backed by the corporation’s ability to make payments
• The corporation’s assets “may” be used to satisfy the claims of bond holders
• Types of corporate bonds:
  1.) callable bonds - can be repurchased before the maturity date
  2.) convertible bonds - can be exchanged for shares of the firm’s common stock
  3.) puttable bonds - give the holder an option to retire or extend the bond
  4.) floating-rate bonds - have adjustable coupon rate

Question 7

Preferred stock

Answer 7

• Shares characteristics of equity & fixed income:
  1.) dividends are paid in perpetuity
  2.) nonpayment of dividends does not mean bankruptcy
  3.) preferred dividends are paid before common
  4.) no tax break

Question 8

Commercial paper

Answer 8

• Unsecured short-term debt obligations issued by corporations with maturities of less than one year