Chapter 2 (Individual Securities - Debt)

Question 1

What are the three different types of maturities for bonds?

Answer 1

Term
Serial (Savings Bonds)
Balloon

Question 2

What is another name for the interest rate that a bond pays?

Answer 2

Coupon Rate

Stated/Nominal Yield

Question 3

What type of calendar/calculation do corporate and municipal trades use?

Answer 3

30-Day-Month

360-Day-Year

Question 4

How are bonds measured?

Answer 4

Points

Each point is worth 1% of face value ($10)

Question 5

What type of relationships do bond prices and interest rates have?

Answer 5

Inverse Relationship
(Bond Price Increase, Interest Rates Decrease)
(Bond Price Decrease, Interest Rate Increase)

Question 6

What are the three types of Bond Yield?

Answer 6

Nominal Yield
Current Yield
Yield to Maturity

Question 7

What is Nominal Yield?

Answer 7

Stated at the time of issue
Coupon Rate
Stated Yield

Question 8

What is Current Yield?

Answer 8

Bond’s annual coupon payment relative to its market price

Annual Coupon Payment / Market Price = Current Yield

Question 9

What is Yield to Maturity?

Answer 9

Reflects the annualized return of the bond if held to maturity.
If the bond is purchased at a discount, the investor makes money
If the bond is purchased at a premium, the investor loses money.

Question 10

How are Yields Measured?

Answer 10

Basis Points (bps)
1/100 of 1%
A full percentage point is made up of 100 basis points

Question 11

What is Yield to Call?

Answer 11

A bond with a call feature may be redeemed before maturity at the issuer’s options. The investor receives the principal back sooner than anticipated (maturity).

Question 12

What are the three major credit rating agencies?

Answer 12

Fitch Ratings
Moody’s Investors
Standard & Poor’s (S&P500)

Question 13

What are Investment Grade Debt Ratings?

Answer 13

Eligible for Institutions and Fiduciaries, greater liquidity
AAA          (Aaa)
AA             (Aa)
A               (A)
BBB          (Baa)

Question 14

What are High Yield Debt Ratings?

Answer 14

Junk Bonds
Higher risk of default, may be subject to price erosion during slow economic times
BB          (Ba)
B             (B)
C            (Caa)
D            (D)

Question 15

What are the three features of a bond?

Answer 15

Call (Issuer Calls it Back)
Put (Investor Puts it Back)
Convertible (Convertible to Common Stock)

Question 16

What are U.S. Treasury with Zero Coupon Rates?

Answer 16

STRIPS

Question 17

What are Treasury Receipts?

Answer 17

Zero’s issued by a BD

Not backed by full faith and credit of the Treasury

Question 18

What is Phantom Income?

Answer 18

Though the interest payment is paid at maturity, owners of zeroes will pay taxes on the interest annually. The total interest payment is divided by the years remaining to maturity and a 1099 interest form will be sent to the owners.

Question 19

What are Secured Debt Securities?

Answer 19

Backed by various assets owned by the issuer
Mortgage Bonds
Equipment Trust Certificates
Collateral Trust Bonds

Question 20

What are Mortgage Bonds?

Answer 20

A corporation will borrow money backed by real estate and physical assets of the corporation.

Question 21

What are Equipment Trust Certificates?

Answer 21

Corporations, particularly railroads and other transportation companies, finance the acquisition of capital equipment used in the course of their business. Title to the new equipment is held in a trust, until the certificates have been paid in full.

Question 22

What are Collateral Trust Bonds?

Answer 22

The corporation deposists securities it owns into a trust to serve as collateral for the lenders.

Question 23

What are Unsecured Debt Securities?

Answer 23

Backked by the corproations full fiath and credit
Debentures
Guaranteed Bonds
Income Bonds
Subordinated Bonds

Question 24

What are Debentures?

Answer 24

Debt obligations of the corporation backed only by its word and general crediworthiness. Promise that the corporation will pay the principal at its due date and interest on a regular basis.

Question 25

What are Guaranteed Bonds?

Answer 25

Backed by a company other than the issuing corporation, such as a parent company. If the issuer defaults, the guranty kicks in and the guarantying company must make the interest or principal payments.

Question 26

What are Income Bonds?

Answer 26

Adjustment Bonds Used when a company is reorganizing and coming out of bankruptcy. Only pay interest if the corporation has enough income to meet interest on debt obligations.

Question 27

What is Subordinated Debt?

Answer 27

Describes a type of debenture | Has claim that is behind that of any creditor

Question 28

Order of Liquidation

Answer 28

``` Secured Debt Holders Unsecured Debt & General Creditors Subordinated Debt Preferred Stockholders Common Stockholders ```

Question 29

Benefits of Owning Debt Securities

Answer 29

Income | Safety

Question 30

Risks of Owning Debt Securities

Answer 30

Default Interest Rate Risk Inflation (Purchasing Power Risk)

Question 31

What are Municipal Bonds?

Answer 31

Securities isssued by state or local goverments or by U.S. territories, authorities, and special districts. Investors who buy such bonds are lending money to the issuers for the purpose of public works and construction projects Tax free on State and Federal Level

Question 32

What are General Obligation (GO) Bonds?

Answer 32

Municipal bonds isssued for captial improvements that benefit the entire community. Do not produce revenues, so principal and interest must be paid by taxes collected Bonds issued by states are backed by income taxes, license fees, and sales tax Bonds issued by town/cities/counties are backed by property taxes, license fees, fines. Require Voter Approval

Question 33

What are Revenue Bonds?

Answer 33

``` Used to finance any municipal facility that generates suffieicent income. Interest payments are made exclusively from revenues by Utilities Housing Transportation Education Health Industrial Sports ```

Question 34

What are short-term municipal obligations?

Answer 34

``` TANs RANs TRANs BANs CLNs GANs ```

Question 35

Formula for Tax Equivalent Yield

Answer 35

Divide the tax-free yield by 100% less the investors tax rate.

Question 36

What are the three types of Treasury Securities?

Answer 36

T-Bills (Less than 1 Year) T-Notes (2-10 Years) T-Bonds (Greater than 10 Years)

Question 37

What are T-Bills?

Answer 37

Less than 1 Year Issued weekly maturities of 4, 13, 26, and at time 52 weeks Can be issued at a discount Highly Liquid No Stated Interest Rate 13 Week T-Bills are stereotypes as risk free.

Question 38

What are T-Notes?

Answer 38

2-10 Years | Pay semi-annual interest rate as a percentage of par

Question 39

What are T-Bonds?

Answer 39

Greater than 10 Years (up to 30 Years) | Pay semi-annual interest rate as a percentage of par

Question 40

What are Treasury Receipts?

Answer 40

BD's buy Treasury securities, place them in a trust at a bank, and sell separate receipts against the principal and coupon payments. Not backed by full faith and credit of hte U.S. Goverment

Question 41

What is the Farm Credit System (FCS)?

Answer 41

A National network of lending institutions that provides agricultural financing and credit. The system is a privately owned, government-sponsored enterprise that raises loanable funds through the sale of Farm Credit Debt Securities

Question 42

What is GNMA (Ginnie Mae)?

Answer 42

Goverment owned corporation that supports the Department of Housing and Urban Development. GNMAs are the only ageny securities backed by the full faith and credit of the federal government.

Question 43

What is FHLMC (Freddie Mac)?

Answer 43

Created to promote the development of a nationawide secondary market in mortgages by buying residential mortgages from financial institutions.

Question 44

What is FNMA (Fannie Mae)?

Answer 44

Purchases conventional and insured mortgages from agencies such as the FHA and the VA. Backed by FNMA general credit.

Question 45

What are Certificates of Deposit (CD's)?

Answer 45

Its a banks promise to pay principal and interest - secured by no physical asset and backed only by the banks good faith and credit.

Question 46

What are Banker's Acceptance?

Answer 46

Short-term time draft with a specified payment date drawn on a bank. A BA is postdated check or line of credit. The payment date of the BA is normally between 1 and 270 days (9 months)

Question 47

What is Commerical Paper (Prime Paper/Promissory Note)

Answer 47

Used to raise cash to finance accounts receivable and seasonal invetnory gluts. Maturity between 1 and 270 days (9 months)

Question 48

What are Repurchase Agreements (REPO's)?

Answer 48

A financial institution reases cash by temporarily selling some of the assets it holds with an agreement to buy back the assets at a later date at a slightly higher price.

Question 49

What is a Federal Funds Loan?

Answer 49

Federal funds can be loaned from one member bank to another for the purpose of meeting the reserve requirement. These loans are very short term and can occur overnight.

Question 50

What are Colateralized Mortgage Obligations (CMO's)

Answer 50

Pool a large number of mortgages, usually single-family residences. Issued by private-sector financing corporations and are often backed by GNMA, FHLMC, and FNMA

Question 51

What are Collateralized Debt Obligations (CDO's)

Answer 51

A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors. These assets become the collateral if the loan defaults.

Question 52

Why would you place money market securities in a client's portfolio?

Answer 52

Highly Liquid Very Safe Good place to invest money that will be needed soon.