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Series 7 > Bonds > Flashcards

Bonds Flashcards

1
Q

PAC

A

Planned Amortization Class

Companion tranches take prepayment and extension risk

PAC is middle of the pyramid

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2
Q

TAC

A

Targeted Amortization Class

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

Tack - pointy on one end

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3
Q

Prepayment risk

A

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

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4
Q

Extension Risk

A

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

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5
Q

GNMA

A

Only purchase FHA and VA loans

Backed by US Gov

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

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6
Q

FNMA

A

Implicitly backed, not required but assumed

Buys student loans from originating financial institutions

Higher interest than GNMA

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7
Q

FHLMC

A

Highest risk

Purchase conventional loans

Implicitly backed by US Gov

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8
Q

General Obligation Bonds

A

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

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9
Q

Revenue Bonds

A

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

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10
Q

GMIB

A

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.

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11
Q

CMB

A

Cash Management Bill

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

Sold in $100 minimums at a discount

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12
Q

Rights Offering

A

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

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13
Q

Eurodollars

A

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

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14
Q

Roth IRA

A

Not available to high net worth individuals

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15
Q

Max Sales Charge on mutual fund

A

8.5%

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16
Q

Elder abuse

A

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

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17
Q

Coverdell plans

A

Contributions not tax-deductible

Distributions are not taxable

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18
Q

HSA

A

Health savings account

Has lower contribution limits than IRA

Are funded with tax-deductible contributions

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19
Q

OBO

A

Order book official

Exchange employee who manages the book of public limit orders

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20
Q

Bond appraisals

A

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

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

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21
Q

Retirement distributions

A

Taxable at 50% unless rolled over into an IRA

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22
Q

Regulation FD

A

Insider trading rules.

23
Q

Treasury Receipts

A

Stripped US Gov Bond sold by brokerage firm.

Pay interest at maturity

24
Q

STRIPS

A

Zero coupon, all repayment at the end.

Must still be accreted

Avoids reinvestment risk

25
Q

Clearing house funds

A

Clears T+2.

Regular way trades of equities, corp and municipal bonds

26
Q

Federal Funds

A

Government and agency bond trades settle here. Including GNMA

27
Q

Treasury Bills

A

$100 minimum; auction weekly

Issued at a discount; zero coupon

NO purchasing power risk

Non-callable; money market instrument

28
Q

Volatility

A

Longer maturity - greater volatility

Lower coupon - greater volatility

29
Q

Callable

A

Occurs when interest rates drop

Call price sets ceiling on market price

Called at par plus premium

Zero coupon - par plus accreted value

30
Q

Credit risk

A

Bonds

Risk that issuer cannot make interest and principal payments on time

31
Q

Capital risk (market risk)

A

Risk that amount invested may not be fully recoverable

32
Q

Interest rate risk

A

As interest rates go up and bond prices fall

Bonds most susceptible are long maturity and low coupon

33
Q

Liquidity risk

A

Risk that selling a position will result in higher than normal transaction costs (commissions)

Typically for smaller, thinly traded issues

34
Q

Timing risk

A

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

35
Q

Purchasing power risk

A

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

36
Q

Marketability risk

A

Risk that security will be difficult to sell

Nonexistent for treasury bonds because market is so large and liquid

37
Q

Reinvestment risk

A

Risk for long-term bond holder

Market rates fall over investment’s timeline

38
Q

Debenture

A

Intermediate and long term corporate bond

Backed by full faith and credit of issuer

39
Q

TIPS

A

Avoids purchasing power risk

40
Q

Settlement

A

Treasuries - next day

Agencies - depends

Cash - same day

41
Q

Debt rating agency

A

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

42
Q

Interest income

A

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)

43
Q

LEAPs

A

Long term equity anticipation

28 month max life for stocks

36 month max life for index

44
Q

American style

A

Exercises at any time

45
Q

European style

A

Exercised at expiration

46
Q

Bank Qualified Bonds

A

Free from federal tax

Bank allowed to deduct 80% of any interest paid on monies borrowed

47
Q

13 D

A

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

48
Q

Additional bonds test

A

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

49
Q

Buying Power

A

Amount of securities that can be bought.

2 times the SMA

50
Q

Selling power

A

Amount of additional securities that can be sold short

2 times the selling power

51
Q

Revenue Bonds

A

Interest and principal repaid by lease payments.

Subject to AMT and regular tax

Final responsibility for debt service on corporate lessee of facility.

52
Q

Construction Loan Notes

A

short term muni note to finance construction of building

Repaid from monies receives from a permanent take-out financing

53
Q

Treasury Bonds

A

Advance refunded in an escrow account

Series 7 (6 decks)

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