Chapter 2 Flashcards
(50 cards)
VRDOs
Developed to get around restriction on rolling over commercial paper debt.
Rates are reset daily, weekly, or monthly
Contain a put option at price equal to face value + interest
What is the definition of a security?
A security involves:
1) investment of money
2) Involves a common enterprise
3) Investors expect to make a profit
4) Profits are delivered by someone other than the investor
How do interest rate changes impact the strength of the dollar?
When interest rates are high that attracts foreign investment, strengthening the dollar.
Duration impacts
Bonds with longer maturities have higher durations.
Bonds with lower coupons have higher durations.
What is the swap spread?
Difference between the swap rate and the current US Treasury rate of the same security.
How does changing reserve requirements change the economy?
When the fed increases reserve requirements it tightens the money supply because banks need to save more and lend less.
AMT Bonds
AMT bonds = qualified private activity bonds that aren’t exempt for AMT calculations.
Bloomberg Valuation Service (BVAL)
constructs a multitude of pricing curves, along with an index number describing the relative strength of the quality and quantity of market inputs.
When must CUSIPs applications be submitted?
For negotiated sales - must be filed to later than the time that issuer and underwriters agree on final price.
Competitive sales - Underwriter must file an application with MSRB immediately after it receives the award from the issuer. CUSIP numbers must be assigned before making public the time of first execution.
What do Fannie Mae and Freddie Mac do?
Purchase mortgages on the secondary market and packages them into mortgage-backed securities. They are thus issuers of MBS.
Zero Coupon Bonds
Pays no interest at all
Attractive to issuer because they do not cost anything until the issue matures, but pay more than they receive.
Attractive to the lender because they sell at a deep discount
How are bank loans regulated?
If the bank buys bonds directly from the issuer then they are a direct purchase. These are considered private placements and regulated by the MSRB and SEC.
If the bank loans funds directly to the issuer, it is a direct loan. Direct loans are not considered securities and are not subject to disclosure requirements.
How are swaps valued?
The value of a swap is the difference between the sum of the present value of all future payments on each side of the swap (variable payments based on the forward swap curve).
This is important because a positive value is considered to be an asset on an end user’s books, while a negative value is seen to be a liability.
The value of swaps will be shown on the balance sheet.
What is the difference between a long swaption and a short swaption?
A long swaption gives the purchaser the right (choice) to make a certain kind of payment.
A short swaption makes the receiver an obligation to make the payment.
What are the two different types of SLGSs?
Time series - Maturities of different lengths (Certificates of indebtedness 15 days to 1 year, Notes 1-10 years, bonds 10-40 years).
Demand series - one day certificates that are automatically rolled over with interest until redemption is requested.
Tax-Exempt Commercial Paper
Short-term promissory note usually backed by a line of credit
Maturities range from 1-270 days
issued at a discount to par
Advantages - Raise funds long-term without paying costs of issuance frequently. Do not need to repeatedly seek political authorization in order to continue reissuing paper.
What are the differences between Treasury bills, notes, and bonds?
T-bills - Mature in less than one year. Do not pay interest, price is discounted to par. Quoted in Yield.
T-Notes - Coupon bonds that have a maturity ranging from 2 to 10 years. Non-callable. Quoted in 1/32 bond points.
Treasury Bonds - Maturities of 10-30 years. May have call provision. Quoted in 1/32 bond points.
All are issued in sizes of $100 to $5 million.
What is the difference between a payer and a receiver swaption?
A payer swaption allows the holder to make fixed payments and receive variable payments.
A receiver swaption allows the holder to make floating payments and receive fixed payments.
What are some uncommon aspects of 529 plans that you should know?
Qualified expenses include tuition and sometimes room and board.
Contributors to 529 plans in their own state usually receive state tax benefits.
Withdrawals can be used for any educational expense including K-12, private and religious schools.
Max annual withdrawal for K-12 is $10K per student.
Contributor can give $14,000 annually without having to pay gift tax.
Withdrawals for non-educational purposes are subject to a penalty of 10% on the earnings. Principal is not taxed or subject to the penalty.
Can rollover from one type to another, or to another state’s plan. Can be conducted without any tax consequences if funds are deposited within 60 days of withdrawal from the old account. Rollovers can only be done once every 12 months. There may be some tax implications of rollovers.
Two types of plans - Prepaid tuition and 529 savings plans
What does a pricing consultant do?
Writes a fairness letter that gives an opinion on whether the underwriter has purchased the bonds for a fair price.
What is Commercial Paper?
Secured by a line of credit at a bank.
Issued at a discount
Typically matures in 90 days or less but can be as long as 270 days.
Issued in lots of $100,000
What is the difference between Pre-Refunding and Escrow-to-Maturity refunding?
Pre-Refunding is for reducing interest rates or shortening the debt maturity schedule.
ETM - Issuer keeps original payment schedule. Generally used to refund non-callable bonds or because you want to terminate restrictive bond covenants.
ABLE accounts
Allows people with disabilities to save money in a tax-deferred account.
Allows people to save money without impacting other benefits
Person must become disabled before age 26
Can only have one account
What are the categories of Municipal Advisor Professionals?
1) Financial Advisors
2) Pricing Consultant
3) Investment Advisor
4) Swap Advisor
5) Financial Feasibility Consultant
6) Pension Funds and Advisors
7) Appraisers
8) Market Consultant
9) Rate Consultant
10) Solicitors
