Bonds

Question 1

PAC

Answer 1

Planned Amortization Class

Companion tranches take prepayment and extension risk

PAC is middle of the pyramid

Question 2

TAC

Answer 2

Targeted Amortization Class

No extension risk, but if interest rates rise, not protected on the back end

Tack - pointy on one end

Question 3

Prepayment risk

Answer 3

risk that interest rate fall, causing mortgage holder to refinance, which pays off CMOs

Question 4

Extension Risk

Answer 4

Risk that interest rates rise, cause mortgage holders not to refinance, which makes mortgage take closer to estimated timeframe.

Question 5

GNMA

Answer 5

Only purchase FHA and VA loans

Backed by US Gov

High wealth investors, interest payments exempt from state and local tax

Question 6

FNMA

Answer 6

Implicitly backed, not required but assumed

Buys student loans from originating financial institutions

Higher interest than GNMA

Question 7

FHLMC

Answer 7

Highest risk

Purchase conventional loans

Implicitly backed by US Gov

Question 8

General Obligation Bonds

Answer 8

Issued by muni governments that are backed by full credit of US government

Question 9

Revenue Bonds

Answer 9

Not backed by US Gov, backed by proceeds of what they’re doing

Feasibility Study is used to see if they can pay back debts

Question 10

GMIB

Answer 10

Guaranteed Minimum Income Benefit

Can be purchased with variable annutiy contract

Guarantees the separate account will grow until guaranteed minimum rate once the contract is annuitized.

Question 11

CMB

Answer 11

Cash Management Bill

Shortest term security by US Treasury. Maturities in lowest of 5 days

Sold in $100 minimums at a discount

Question 12

Rights Offering

Answer 12

Preemptive rights to subscribe to newly issued common shares distributed to company’s existing shareholders

Question 13

Eurodollars

Answer 13

US dollars held in European countries. Interest paid is based on LIBOR

Question 14

Roth IRA

Answer 14

Not available to high net worth individuals

Question 15

Max Sales Charge on mutual fund

Answer 15

8.5%

Question 16

Elder abuse

Answer 16

Hold on account for 15 days, can be extended for 10 additional days

Question 17

Coverdell plans

Answer 17

Contributions not tax-deductible

Distributions are not taxable

Question 18

HSA

Answer 18

Health savings account

Has lower contribution limits than IRA

Are funded with tax-deductible contributions

Question 19

OBO

Answer 19

Order book official

Exchange employee who manages the book of public limit orders

Question 20

Bond appraisals

Answer 20

Trading market is thin, no “real time” price reporting.

True market value is uncertain, and not reported to consolidated tape

Question 21

Retirement distributions

Answer 21

Taxable at 50% unless rolled over into an IRA

Question 22

Regulation FD

Answer 22

Insider trading rules.

Question 23

Treasury Receipts

Answer 23

Stripped US Gov Bond sold by brokerage firm.

Pay interest at maturity

Question 24

STRIPS

Answer 24

Zero coupon, all repayment at the end.

Must still be accreted

Avoids reinvestment risk

Question 25

Clearing house funds

Answer 25

Clears T+2. Regular way trades of equities, corp and municipal bonds

Question 26

Federal Funds

Answer 26

Government and agency bond trades settle here. Including GNMA

Question 27

Treasury Bills

Answer 27

$100 minimum; auction weekly Issued at a discount; zero coupon NO purchasing power risk Non-callable; money market instrument

Question 28

Volatility

Answer 28

Longer maturity - greater volatility Lower coupon - greater volatility

Question 29

Callable

Answer 29

Occurs when interest rates drop Call price sets ceiling on market price Called at par plus premium Zero coupon - par plus accreted value

Question 30

Credit risk

Answer 30

Bonds Risk that issuer cannot make interest and principal payments on time

Question 31

Capital risk (market risk)

Answer 31

Risk that amount invested may not be fully recoverable

Question 32

Interest rate risk

Answer 32

As interest rates go up and bond prices fall Bonds most susceptible are long maturity and low coupon

Question 33

Liquidity risk

Answer 33

Risk that selling a position will result in higher than normal transaction costs (commissions) Typically for smaller, thinly traded issues

Question 34

Timing risk

Answer 34

Risk that buying and selling occur at disadvantageous price levels due to poor market timing

Question 35

Purchasing power risk

Answer 35

Risk inflation will lower value of bond interest payments and principal repayment

Question 36

Marketability risk

Answer 36

Risk that security will be difficult to sell Nonexistent for treasury bonds because market is so large and liquid

Question 37

Reinvestment risk

Answer 37

Risk for long-term bond holder Market rates fall over investment’s timeline

Question 38

Debenture

Answer 38

Intermediate and long term corporate bond Backed by full faith and credit of issuer

Question 39

TIPS

Answer 39

Avoids purchasing power risk

Question 40

Settlement

Answer 40

Treasuries - next day Agencies - depends Cash - same day

Question 41

Debt rating agency

Answer 41

Moody’s, Standard and Poor, and Fitch’s

Question 42

Interest income

Answer 42

US Gov obligations subject to federal, exempt from state and local Mortgage backed securities subject to federal and state/local tax Municipal income subject to state and local, exempt from federal (if purchased in another state, interest is taxable in other state)

Question 43

LEAPs

Answer 43

Long term equity anticipation 28 month max life for stocks 36 month max life for index

Question 44

American style

Answer 44

Exercises at any time

Question 45

European style

Answer 45

Exercised at expiration

Question 46

Bank Qualified Bonds

Answer 46

Free from federal tax Bank allowed to deduct 80% of any interest paid on monies borrowed

Question 47

13 D

Answer 47

Anyone who holds 5% or more in a publicly traded company. Indicates they might try to gain control

Question 48

Additional bonds test

Answer 48

Earnings test must be satisfied before additional bonds can be issued against the same revenue source

Question 49

Buying Power

Answer 49

Amount of securities that can be bought. 2 times the SMA

Question 50

Selling power

Answer 50

Amount of additional securities that can be sold short 2 times the selling power

Question 51

Revenue Bonds

Answer 51

Interest and principal repaid by lease payments. Subject to AMT and regular tax Final responsibility for debt service on corporate lessee of facility.

Question 52

Construction Loan Notes

Answer 52

short term muni note to finance construction of building Repaid from monies receives from a permanent take-out financing

Question 53

Treasury Bonds

Answer 53

Advance refunded in an escrow account