Bonds (Lesson 5) Flashcards
(64 cards)
1
Q
US Treasury securities are nontaxable at the
A
- state and local level
2
Q
Are Series EE/ Series E Bonds marketable securities
A
- no they are nonmarketable securities
3
Q
Series EE bonds are sold at
A
face value
4
Q
Do Series EE bonds pay interest periodically
A
- No bond slowly increases in value over 20 years based on fixed rate at time of purchase
5
Q
When is the interest on Series EE taxable
A
- not until the bond is redeemed
6
Q
When does Series HH pay interest
A
- semiannually
- not issued since August 2004
7
Q
What are Series I bonds
A
- inflation indexed bonds issued by the US government
- Adjust the interest paid for inflation
8
Q
What are series I bonds sold at and is the rate or return guaranteed
A
- Sold at face value
- no guaranteed rate or return
9
Q
What is the interest portion on series I bonds consisted of
A
- Fixed rate of return
- Inflation component that is adjusted every six months
10
Q
What are nonmarketable US Tresuries
A
- Series EE
- Series HH
- Series I
11
Q
What are marketable US tresuries
A
- US Treasury Bills
- US Treasury Notes
- US Treasury Bonds
12
Q
What are US Treasury bills maturities
A
- less than 1 year
13
Q
How are US Treasury bills sold
A
- On a discounted yield basis which means they do not pay interest
- Bonds mature at par value
14
Q
What are US Treasury notes maturities
A
- between 2 and 10 years
15
Q
When is interest paid on US Treasury Notes
A
- Semi annually
16
Q
What are US Treasury bonds maturities
A
- greater than 10 years
17
Q
When is interest paid on US Treasury Bonds
A
- Interest is paid semi annually
18
Q
How are treasury securities sold
A
- on an auction basis with the lowest yield winning the auction
19
Q
How is an OID bond issued
A
- at discount from par value
- EX: A zero coupon bond that is sold at a deep discount to par value. A $1,000 par value zero coupon bond may sell for $600 and the bond will then increase in value over the term of the bond until it matures at par value
20
Q
When must an investor recognize interest on zero coupon bond
A
- Every year which is why the bond increases in value each year even though no interest is paid
21
Q
What type of protection do Treasury Inflation Protected Securities offer
A
- inflation and purchasing power protection
22
Q
Does the coupon rate change on a TIPs
A
- no coupon rate does not change
- principal/par value adjusts for inflation and then the coupon rate is applied to the new principal amount
23
Q
What are separate trading of registered interest and principal securities (STRIPS)
A
- periodic coupon payments are separated from the bond and each coupon payment including the par value trade separately
24
Q
Treasury STRIPS are essentially
A
- zero coupon bonds
25
STRIPS are appropriate for investors looking for
- Low risk
- High liquid investment
- Specific time horizon
26
What are federal agency securities
- are moral obligations of the US government but are not backed by the full faith and credit of the US government
27
What is the exception to an agency bond that is backed by the full faith and credit of the US governement
- GNMAs
28
Is the below agency a on budget or off budget debt
GNMA - Ginnie Mae
On Budget
29
Is the below agency a on budget or off budget debt
Farmers Home Administration (FHA)
On Budget
30
Is the below agency a on budget or off budget debt
FNMA - Fannie Mae
Off Budget
31
Is the below agency a on budget or off budget debt
FHLMC - Freddie Mac
Off Budget
32
Is the below agency a on budget or off budget debt
SLMA - Sallie Mae
Off Budget
33
Is the below agency a on budget or off budget debt
FFCB - Federal Farm Credit Banks
Off Budget
34
Is the below agency a on budget or off budget debt
FICB - Federal Intermediate Credit Banks
Off Budget
35
Is the below agency a on budget or off budget debt
FHLB - Federal Home Loan Bank
Off Budget
36
What is a GNMA or Ginnie Mae
- Mortgage backed security
- consists of a pool of FHA/VA guaranteed mortgages
- Each month GNMA distributes interest and principal payments
37
Are the FNMA or Fannie Mae and FHLMC or Freddie Mac backed by the US government
- Not backed by the US government
38
What is the biggest risk to mortgage backed securities
- falling interest rates
- causes repayment of mortgages early
39
What are mortgage backed securities (MBS)
- backed by a pool of mortgages
- payments consist of both interest and principal
- biggest risk to bond holder is prepayment risk
40
What is a collateral trust bond
- backed by an asset owned by the company issuing the bonds
- asset is held by a third party
- in the event of default the bond holders are entitled to the asset being held in trust
41
What are collateralized mortgage obligations (CMOs)
- investors are divided into tranches which determines which investors will receive principal repayment
- interest form the pool of mortgages is distributed pro rata and the principal repayments are used to retire tranches sequentially
42
Do short term or long term tranches in a CMO get principal first
- short term tranche receive principal repayment first
43
What risk are CMOs meant to mitigate against
- prepayment risk associated with mortgage backed securities
44
What is a debenture
- are simply unsecured debt that is not backed by an asset
- backed on the belief of the creditworthiness that the issuing company (or government) will repay the debt
45
What are subordinate debentures
- have a lower claim on assets than other unsecured debt
- have more risk because of the lower claim on assets if the company defaults on the bond repayment
46
What are income bonds
- stipulate that interest is only paid when a specific level of income is attained
47
What ratings agencies rate bonds
- Moody's
- Standard and Poors
- both rate on the company's default risk and investment quality
48
The higher the bond rating means the _____ the yield
- the lower the yield
49
What do bond rating agencies analyze
- Liquidity
- Total amount of debt
- Earnings and stability of those earnings
50
What are Moody's ratings for investment grade bonds
- Aaa - Baa are investment quality bonds
- Ba and below are junk bonds
51
What are Standard and Poor's ratings for investment grade bonds
- AAA - BBB are investment quality bonds
- BB and below are junk bonds
52
What are Guaranteed Investment Contract (GIC)
- issued by insurance company's with a guaranteed rate of return
- insurance company agrees to repay the principal and guaranteed rate of return for a period of time
- yield is higher than treasury securities
53
What are the three types of municipal bonds
- General obligations
- Revenue bonds
- Private activity bonds
54
What is a general obligation bond
- backed by the full faith, credit, and taxing authority of the municipality that issued the bond
55
What is a revenue bond
- not backed by the revenue of a specific project
- not backed by the full faith, credit, and taxing authority of the entity that issued the bond
56
What are private activity bonds
- used to finance construction of stadiums
57
What companies insure municipal bonds
- American Municipal Bond Assurance Corp (AMBAC)
- Municipal Bond Insurance Association Corp (MBIA)
58
What happens when an insured municipal bond is in default
- the insurance company will pay the interest and principal amounts
59
What risks do corporate bonds have
- default risk
- reinvestment rate risk
- interest rate risk
- purchasing power risk
60
What risks do US government bonds have
- reinvestment rate risk
- interest rate risk
- purchasing power risk
61
How do you calculate the the tax equivalent yield for a triple tax free bond
- add all of the tax rates together and use that as the marginal rate
62
TEY = r / (1-t) What is r and what is t
- r = tax exempt yield
- t = marginal tax rate
63
What is the formula for a double tax free bond if a client itemizes
Tax Exempt yield / (1 - (FT + ST(1 - FT))
- FT = Federal tax rate
- ST = State tax rate
64
If the yield ratio is Rtf(Tax free) / Rt(Taxable) how does a higher ratio affect the attractiveness of a municipal bond
- As the tax free return increases the ratio becomes bigger so the higher the ratio the better - the closer the tax free rate is to the taxable rate the investor will always choose the tax free rate
