CHAPTER 3

Question 1

Term Bonds

Answer 1

Whole issue matures at once

Question 2

Sinking fund

Answer 2

Issuers establish a cash reserve to save up to pay the debt

Question 3

Serial bonds

Answer 3

Parts of the principal are paid at intervals

Question 4

Balloon bonds

Answer 4

Hybrid maturity schedule

Question 5

Accrued Interest

Answer 5

Amount held gets paid to the old holder. Actual days in each month and actual days in each year are used.

Question 6

Relationships of a bonds yield when it is trading a premium, discount, and at par

Answer 6

Discount: NM < CY < YTM < YTC

Par: NM = CY = YTM = YTC

Premium: NN > CY > YTM > YTC

Question 7

Current Yield

Answer 7

Annual Coupon Payment / Market Price

Question 8

Bond Call vs Bond Put

Answer 8

Call: Lets issuer call when interest rates drop

Put: Lets investor sell when interest rates rise (can get a better deal)

Question 9

Convertible Bond

Answer 9

Investor can convert to stock

When both are equal it is at parity

Question 10

Zero-Coupon

Answer 10

T-Bills and STRIPS

Phantom income

Accretion

Deep discount and no interest

More volatile

Question 11

S&P Rating

Moody’s Rating

Answer 11

S&P: AAA AA. A BBB

Moody’s: Aaa Aa A Baa

Question 12

Duration

Answer 12

Longer term - higher duration more volatile

Higher premium - lower duration less volatile

Question 13

Risks

Answer 13

Default

Interest rate

Purchasing power

Question 14

Secured Debt

Answer 14

Has collateral, value of that will exceed face value of bond at time of issue

Question 15

Mortgage Bonds

Answer 15

backed by real estate owned by corp

SECURED DEBT

Question 16

Equipment Trust Certificates

Answer 16

secured by equipment the corp uses. could see rolling stock
title to the assets are held in trust

SECURED DEBT

Question 17

Collateral trust bonds

Answer 17

backed by a portfolio of securities held in trust that can’t be touched except for collateral reasons

needs to be liquid and exceed loan amount and longer than term of the bond
treasury’s often used

SECURED DEBT

Question 18

Debentures

Answer 18

most senior of unsecured debt SENIOR

UNSECURED DEBT

Question 19

Guaranteed bonds

Answer 19

Bonds are the responsibility of the issuer but are further backed by a third party usually parent company

UNSECURED DEBT

Question 20

Income bonds (adjustment bonds)

Answer 20

only make interest payments when company has enough income

NOT GOOD FOR INCOME

UNSECURED DEBT

Question 21

Subordinated debt

Answer 21

Just below debentures in order with higher coupon

Junior

UNSECURED DEBT

lowest level of unsecured debt

Question 22

ORDER OF LIQUIDATION

Answer 22

secure debt holders

debentures and general creditors (wages and vendors)

subordinated debt holders

preferred stock

common stock

Question 23

STRIPS vs Receipts

Answer 23

STRIPS from Government (backed)

Receipts from BDs (not backed)

Question 24

Most common debt issuing agencies

Answer 24

Farm Credit System (not backed)

GNMA (backed) (monthly payments) (taxed on all income)

FHLMC (not backed)

FNMA (not backed)

Question 25

GO vs Revenue

Answer 25

GO backed by tax payers (sources where no profit) debt limits Revenue not backed by tax (sources of profit) no debt limits

Question 26

Tax Equivalent Yield Taxable Equivalent Yield

Answer 26

Tax Equivalent = tax free rate / 100% - tax Taxable Equivalent = taxable rate * 100% - tax

Question 27

MM Funds

Answer 27

Short term NOT normal CDs but negotiable CDs 1 year or less liquid, safe, easy

Question 28

CMOs vs CDOs

Answer 28

Securitized Tranches CDOs no residential debt

Question 29

Backing of CMO

Answer 29

Mortgages

Question 30

Repurchase Agreements

Answer 30

REPO: Bank or BD raises cash by selling some of their assets with an agreement to buy it back at a slightly higher price (sell then buy back higher) Reverse REPO: (buy then sell back higher) essentially being on the receiving end of a REPO

Question 31

Where are non-State Muni bonds taxed?

Answer 31

NOWHERE - non-State muni bonds are not taxed federally or at the state level

Question 32

Ad Valorem Taxes

Answer 32

These are real estate taxes by cities or local municipalities

Question 33

6% corporate bond with a 5% basis is what?

Answer 33

5% YTM 6% nominal yield selling at a premium

Question 34

Balloon maturity

Answer 34

Major portion of principal debt is paid on final maturity date Mostly interest up until then

Question 35

Who gets paid first in corporate liquidations?

Answer 35

Secured Creditors

Question 36

Federal Funds Represent

Answer 36

The amount that a bank exceeds its required deposits to be held on reserve at the Federal Reserve Board The amount that it holds in excess it can then lend to other banks at the Fed Funds rate

Question 37

Federal Funds definition

Answer 37

FRB mandates how much money its member banks must keep on reserve at the Federal Reserve Any deposits in excess of required amounts are Federal Funds

Question 38

Corporation wanting to raise cash for accounts receivable and seasonal inventory is least likely to issue:

Answer 38

Bonds Bonds are more long term These are short term needs so they could issue commercial paper, promissory notes, or prime paper Commercial paper, promissory notes, and prime paper are all the same thing!

Question 39

Who issues Treasury Receipts?

Answer 39

BDs

Question 40

Muni bonds can be issued by a lot of entities but no which ones?

Answer 40

CANNOT BE ISSUED BY AGENCIES Can be issued by states, territories, or districts

Question 41

Is a 29 year old T-Bond that was issued 30 years ago a MM instrument?

Answer 41

YES because it has 1 year left

Question 42

How long is the maturity of a typical bankers acceptance?

Answer 42

1 day to 180 days typically Can go as long as 270 days but not usually

Question 43

Do income bonds pay income only when declared by BoD?

Answer 43

YES

Question 44

Are negotiable CDs usually issued in amounts of $100k-$1M?

Answer 44

YES

Question 45

Do negotiable CDs usually mature in 5-10 years?

Answer 45

NO they usually mature in around a year or less

Question 46

What does D mean for bond ratings?

Answer 46

Default