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Flashcards in Debt Instruments Deck (134):

Risk that an issuer may become unable to meet interest or principal payments 


Also known as business or default risk

Credit Risk


Order from lowest to highest risk of bond issuers


  • Corporate
  • Government
  • Municipal

  1. Government
  2. Municipal
  3. Corporate


Identify the credit rating issuer







Identify the credit rating issuer







What is the threat of suffering a loss due to a chanige in interest rate? All fixed income securities are subject to this.

Interest Rate Risk 


Risk that in a falling interest rate environment, bond proceeds must be reinvested at lower rates

Reinvestment Risk


Risk that a callable bond will be redeemed by the issuer before maturity, which is usually when interest rates have fallen.

Call Risk


All of the bonds are issued at once and all mature at once.


Example quote: 98, 101 1/2

Term Bonds


All bonds are issued at once and mature in increments over several years.


Example quotes: 6.10%

Serial Bonds


Rate which the issuing corporation has contracted to pay interest through the life of the bond

Stated Rate

Nominal Rate

Coupon Rate



(Annual Dollar Interest Paid) x 100%


(Current Market Price)

Current Yield


Discount Bond yields from lowest to highest

  • Current Yield
  • Nominal Yield
  • Yield to Maturity
  • Yield to Call

  1. Nominal
  2. Current Yield
  3. Yield to Maturity
  4. Yield to Call


Premium Bond Yields from lowest to highest

  • Yield to Maturity
  • Nominal Yield
  • Current Yield
  • Yield to Call

  1. YTC
  2. YTM
  3. Current Yield
  4. Nominal Yield


The measure of current net market yields on a mutual funds portfolio. 

Standardized Yield (SEC Yield)


If the issuer of the bonds has transferred title to specific assets to the custody of a trustee, what kind of bonds are being sold?

Secured Bonds


What are some assets that back secured bonds?

  • Real estate mortgages
  • Equipment owned by issuer
  • Collateral Trust Certificates


Most common secured bond collateralized by lien or mortgage against real estate property

Mortgage Bond


Bond that allows the corporation to issue subsequent bonds secured by the same property at a later time

Open-End Bonds


Bonds that specify the maximum indebtedness the corporation can issue against the same lien, which also offers the greatest protection

Closed-End Bonds


List of covenants that serves as a contract between issuer and trustee that states whether bond issue is open or closed ended. Found in revenue bonds.

Bond Trust Indenture


Bonds issued by railroads and airlines that are secured by the railroad cars and airplanes

Equipment Trust Certificate


Bonds secured by the securities of a different issuer

Collateral Trust Certificate


Bonds issued by well established corporations that are backed by the full faith and credit of the issuer, which carry more risk and pay a higher coupon rate 

Unsecured Bonds or Debentures


Bond issue that is guaranteed by the full faith and credit of an issuer, but is also cosigned by another entity

Guaranteed Bond


Bonds that are convertible into common stock of the issuer at the bondholder's discretion

Convertible Bond


Bond that has initial nominal rate which increases to a prespecified higher rate

Step Up Bond


When a corporation cannot honor the terms of a bond issue, this is the product of the debt renegotiation or bankruptcy proceedings.

Income Bond


Highly liquid and very safe investments that are guaranteed by the full faith and credit of the US Government and issued in book entry form

Treasury Securities


Treasury security taxation for interest and capital gains

Interest subject to federal tax but not state or local taxes

Capital gains fully taxable


What are securities that must be redeemed by the treasury through banks and do not trade investor to investor?

Ex. Series EE, Series HH

Non-Marketable Securities


Treasury issue securities that can be traded for value on the secondary market

Marketable Securities


When securities are issued and exist only as electronic records in computers without physical certificates of ownership

Book-Entry Form


Government security that is an Original Issue Discount instrument (OID), has maximum 1 year maturity, is quoted on a discount yield basis, has no stated interest rate and does not pay semiannual interest


Example Quote:

Bid - 7.45

Ask - 7.30

Treasury Bill


What are the T-Bill maturities and how are they auctioned?

  • 4 weeks
  • 13 weeks (auctioned every week)
  • 26 weeks (every week)
  • 52 weeks (every month)


Government Security that has maximum 10 year maturity, has stated interest rate, quoted in points as a percentage of par, pays semi-annual interest and known as interest bearing security


Example Quote: 102.20



Government security that has maturity greater than 10 years, stated interest rate, semiannual interest and is known as an interest bearing security


Example Quote: 102.20



Treasury Issued Security whose principal is adjusted for inflation using consumer price index (CPI), has constant stated interest rate, and fluctuating semiannual interest payments

Treasury Inflation Protection Security (TIPS)


TIPS Maturities

  • 5 Years
  • 10 Years
  • 30 Years


What are zero coupon bonds issued directly from the US Treasury at a deep discount that gain value every year and the gain is considered interest income?

Separately Traded Registered Interest and Principal Securities (STRIPS)


Zero coupon bonds issued by broker/dealers at a deep discount but are not backed by the full faith and credit of the US government


It is an escrow receipt of escrowed US Treasury securities

Treasury Receipts


Derivative securities that derive their value from an underlying pool of GNMA, FNMA or FHLMC mortage-backed securities

Collateralized Mortgage Obligations (CMO)


Risk that if interest rates fall, CMO maturity will shorten due to homeowners refinancing and paying of their mortgages quicker, which returns principal to investors sooner rather than later.

Prepayment Risk


Risk that if interest rates rise, CMO maturity would lengthen due to homeowners not wanting to refinance and the investor would receive principal later than anticipated

Extension Risk


Government agency that provides money for student loans

Student Loan Mortgage Corporation (Sallie Mae)


Government agency that buys government mortgages, conventional mortgages and insured mortgages

Conventional and short term $10k Par Bond, Semiannual Interest

Federal National Mortgage Assocation (Fannie Mae)


Government Agency that buys FHA, VA and Farmer's Home Administration insured mortgages


$25k modified mortage backed pass throughs, monthly interest

Government National Mortgage Association (GNMA)


Government Agency that buys conventional mortgages from financial institutions


$25k participation certificate pass through securities, semi-annual interest

Federal Home Loan Mortgage Asssocation (Freddie Mac)


Slice of a CMO that functions as its own bond with its own characteristics



Safest tranche that has the more certain maturity date with less prepayment and extension risk

Planned Amortization Class (PAC)


Tranche with a higher yield that has more prepayment and extension risk

Targeted Amortization Class (TAC)


The riskiest and highest yielding CMO class that receives no principal or interest until all other tranches are paid



Type of collateralized security that is backed by short term loans on assets rather than real estate


Examples: Auto, Credit Loans

Asset Backed Security (ABS)


Notes, bonds, or CDs that are based on US dollars in foreign repositories, mainly in Europe, that can be issued by foreign corporations, domestic corporations or municipalities.


Cannot be issued by US Government

Eurodollar Securities


Bond that ranges in maturity from 5-10 years, pays interest once a year and is not subject to withholding taxes with a market centered in London

Eurodollar Bond


What advantages do US corporations have in the Eurodollar Market?

  • No foreign exchange risk
  • Lower interest rates compared to domestic rates
  • Lower issuance expenses


Short term, high quality debt issued by corporations or municipalities

Money Market Debt


Unsecured corporate notes issued by blue chip companies with maturities ranging from 30-270 days. These are exempt securities.


Example Ratings: P-1, P-2, P-3, P-4

Commercial Paper


Letters of credit, or import/export notes

Bankers Notes


Collateralized paper issued for the purpose of buying and reselling securities typically overnight, from T-Bills to mortages to provide short term funds

Repurchase Agreements


The process when a company wants to refinance and retire older bonds with higher interest rates. The issuer will sell new bonds with the lower interest rate and the proceeds will be used to retire the higher interest bond after the call protection has expired. In the interim, the low interest bond proceeds will be held in an escrow account that is invested in short-term treasury or agency bonds.

Advanced Refunding or Pre-Funding


An advance refunded high interest bond that is guaranteed to be called on its called date, is quoted YTC, and is automatically AAA rated due to its escrow account.

Defeased Bond


A covenant contained in the bond indenture that describes the process of advanced refunding, or pre-funding.

Covenant of Defeasance


Bonds backed by full faith and credit of the issuer, which is the overall taxing authority. For states, its income and sales tax. Counties, ad valorem or property taxes.

General Obligation Bonds (GO Bond)


Limit which establishes a ceiling for the total amount of general obligation debt that any community or government can issue.

Debt Limit


A situation where multiple taxing authorities in a given geographic area have the ability to tax the same real estate that is considered a part of total GO debt.


Example: School district falls within a city. Both entities can tax residents.

Overlapping Debt


What do GO bonds use to make debt service payments, which is interest and principal owed by the issuer?

Tax Collections


GO debt backed by insecure, inadequate or insufficient revenue sources and tax collections. These cannot be advertised as revenue bonds due to its GO portion.

Double-Barreled Debt


Bonds backed by user fees, revenues or special assessments that are collected from the facility or project. Projects include hospitals, toll roads, toll bridges, shipping ports, airports, and water and sewer systems. These are considered less safe than GO Bonds

Revenue Bonds


Revenue bond where the state legislative authority can appropriate money to pay off the bond issue. It is not a legal obligation.

Moral Obligation Bond


The analyst is reviewing a bond considering these factors. What bond is it?

  • Debt Statement
    • Overall municipality debt - self supporting debt
  • Overlapping Debt
  • Demographics
    • Income per capita
    • economic diversification
    • Ability to collect taxes
  • Community attitude towards debt and taxes

GO Bond


The analyst is reviewing a bond considering these factors. What bond is it?

  • Feasability studies
  • Competing facilities
  • Debt service coverage ratio

Revenue Bond


Federally taxable bonds issued to build sports stadiums or parking lots that are usually backed by corporations

Industrial Development Revenue Bonds (IDRs)


Covenant in bond indenture that says issuer will set user rates so that they are sufficient to pay interest and repay principal in the bonds.

The Rate Covenant


Covenant that addresses future issues of bonds. If additional bonds test determines that revenues from the facility are sufficient to support more new bonds, this covenant determines whether the bonds are open or close ended.

Open end, close end covenant


Covenant that says issuer will maintain the facility so that it continues to generate revenues to repay bondholders

Maintenance Covenant


Covenant that says if an extraordinary event were to occur, the issuer will use insurance proceeds to pay off existing bonds. The issuer then issues new bonds to finish the project.

The Catastrophe Covenant


Escrow account that the issuer contributes to periodically, used specifically to retire bonds at maturity or call them earlier

Sinking Fund


Covenant that says if escrow account for retiring bonds grows too rapidly, a mandatory call will be issued because the issuer cannot make money on the escrow account.

Sinking Fund Covenant


Pledge that the issuer will pay operations and maintenance first, then debt service.

Net Revenue Pledge


Pledge to pay debt service first, then operating and maintenance expenses.

Gross Revenue Pledge


What are these ratings and who made them?


MIG-1, MIG-2, MIG-3

Moody's Short Term Munis


Short term municipal note issued in anticipation of a future tax collection. MIG-1 Rating, safest note.

Tax Anticipation Note (TAN)


Short term municipal note issued in anticipation of facility revenues

Revenue Anticipation Note (RAN)


Short term municipal note issued in anticipation of issuing a bond in the future. Riskiest note.

Bond Anticipation Note (BAN)


Short term municipal note issued in anticipation of tax and revenue collection

Tax and Revenue Anticipated Note (TRAN)


Short term municipal note used to finance short term needs of the municipality. The stated rate will fluctuate.

Variable Rate Notes (VRN)


Long term bond with an interest rate that resets by Dutch Auction, issued by municipalities, corporations and government agencies. Not money market security, not necessarily liquid.

Auction Rate Securities (ARS)


Taxable municipal bonds created by the American Recovery and Reinvestment Act of 2009, issued to fund public projects like highways, which offer either a federal subsidy to the issuer or a tax credit to the investor. 


Issued from February 2009 to December 2010

Build America Bonds (BAB)


When a banker/dealer acting as an adviser for a municipal underwriter discloses to an investor their involvement as an adviser to the issuer and underwriter of the new issue, what kind of underwriting is occuring?

Competitive Bid Underwriting


When a banker/dealer acting as an adviser for a municipal underwriter terminates themselves as an adivser in writing, discloses total compensation as adviser and underwriter and states to the issuer that there is a potential conflict of interest in dual capacity, what kind of underwriting is being done?

Negotiated Underwriting


Regarding municipal underwriting, what is found on the

  • Preliminary or Official Statement
  • Bond Confirmation, Invoice or Receipt



Disclosure of advisory relationship to muni issuer


Obtained by the bond counsel (issuer's attorney) for the bond issue that verifies the issuers legal authority to issue, whether the bond interest is federally tax exempt, and whether the bonds are exempt from SEC registration

Legal Opinion


Bond Counsel sees no issues that could jeopardize the bond's status

Non-Qualified Opinion (Clean Opinion)


Bond counsel has identified potential issues that could affect bond status

Qualified Opinion


Bond trades without legal opinion



Bonds most commonly underwritten on a competitive basis

GO Bonds


Bonds most commonly underwritten on a negotiated basis

Revenue Bonds


An issuer places an invitation to bid on their bonds in the Daily Bond Buyer, where the official notice of sale is posted. What just happened?

The competitive bid underwriting process begins


The most important publication in the primary municipal market which contains information important to primary market participants, which includes

  • 30 Day Visible Supply
  • Placement Ratio
  • Revdex
  • G.O. Index
  • 11 Bond Index

Daily Bond Buyer


Information found in the Daily Bond Buyer that shows the total number of bonds coming into the market over the next 30 days

30 Day Visible Supply


Information found in the Daily Bond Buyer that shows the number of bonds placed divided by number of bonds offered over the previous week

Placement Ratio


Information found in the Daily Bond Buyer that shows the yield index of 25 revenue bonds with 30 year maturities. The bonds have various credit ratings and come from different industries such as stadiums and hospitals.

The Revdex


Information found in the Daily Bond Buyer that shows the yield index of 20 GO bonds with 20 year maturities

G.O. Index


Information found in the Daily Bond Buyer that shows the index of the average price of 40 recently issued bonds with an average maturity of 20 years

Bond Buyer Municipal Bond Index (40 Index)


Information found in the Daily Bond Buyer that shows the index comprised of 11 GO bonds that are AA rated with 20 year maturities and is used as a benchmark for municipal bonds

11 Bond Index


Wire service that provides up to date information on news affecting the municipal industry. The information is useful to underwriters in structuring and pricing new issues because it determines conditions such as competitive interest rates and buyer interest.



How does an underwriter win a competitve bid?

Submit a bid resulting in the lowest net interest cost to the issuer


What is happening when the total number of bonds allocated to purchasers exceeds the number of bonds in the offering and the underwriter has to follow an established procedure in allocating the bonds?

The issue is over-sold


When a bond issue is over-sold, what is the priority order of bond allocation?

  1. Pre-Sale
  2. Syndicate or Group Net
  3. Designated net
  4. Member Related Orders


Orders that involve accumulation accounts being established prior to offering UITs or bond mutual funds that are filled first when a bond issue is oversold. These are not allowed often due to the managing underwriter wanting to avoid favoritism.



Order that benefits every member of the syndicate where the name of the buyer must be disclosed that is second in priority for an oversold bond issue

Syndicate or Group net Order


Order in which the managing underwriter designated specific firms to complete the sale of the bonds and specified to those firms their takedown or compensation, and is third in priority for an oversold bond issue

Designated Net Order


Order for the accumulation account of one syndicate member that has the lowest possible priority

Member-Related Order


Municipal bond underwriting syndicate where each member is responsible for unsold shares according to their original percentage of participation

Eastern Syndicate (Undivided)


Municipal bond underwriting syndicate where each broker/dealer is responsible for their percentage of the deal and nothing more

Western Syndicate (Divided)


Compensation paid for underwriting that includes the takedown and managers fee. 

Municipal Underwriting Spread


Part of the municipal underwriting spread that includes a syndicate fee and a selling concession



Additional takedown in a corporate underwriting that is paid to each member of the syndicate according to their percentage of the underwriting.

Syndicate Fee


Paid to syndicate members who sell bonds and also to selling group. 

Selling Concession


Quote in the municipal secondary market that is for information purposes only and is not binding. It is used to determine possible interest in one of its inventory positions, or availability and price on a abond it wants to buy.

Bid Wanted or Offer Wanted


A non binding quote that is used by dealers to value bonds in inventory or if the dealer needs an estimated market price to consider a trade.

Working or Workable Indication


Can a municipal dealer advertise a bond it doesn't own? Why or why not?

Yes, it can as long as the dealer can get the bonds if asked and the dealer is not aware that the bonds are no longer available


Quote that is good for an hour that reserves the right for the dealer to accelerate the deadline to 5 minutes.

Out firm, with five minute recall


The MSRB system in which dealers report the sale and purchase of the municipal bond. This helps provide transparency into the municipal trading market to the public.

Real Time Transaction Reporting System (RTRS)


System made to promote transparency in the marketplace by providing the most current information on municipal issuers to public customers as well as professionals, which includes copies of the official statements as well as last trades.

Electronic Municipal Market Access (EMMA)


System that provides industry professionals and public investors with last trade information about instruments with short-term rates. This information is based on input from at least 3 professionals who access this system thorugh a password-protected website

Short-term Obligation Rate Transparency System (SHORT)


Self Regulating Organization for the municipal bond industry which drafts rules regulating broker/dealers and has no staff of examiners to monitor or enforce rules, which is done by the SEC and FINRA. Broker/dealers who underwrite or trade munis must join this SRO. 

Municipal Securities Rule Making Board (MSRB)


If a credit analyst, training personnel, anyone handling order, money, or securities, making recommendations or another person has responsibility in a firm other than clerical and ministerial, they must pass these tests per MSRB rules.

Series 7 or Series 52


Per MSRB rules, this person must apprentice for 90 days from employment, cannot talk to the public or be compensated for transactions in securities. They have 180 days to pass the Series 7 or 52, but only for municipal sales functions. Any other functions other than muni sales requires series 52.

Municipal Finance Professional (MFP's)


Full and fair disclosure of persons of a brokerage working or associated with the municipality, of a municipality working or associated with the brokerage, or an adviser serving as an underwriter in a negotiated underwriting, or a broker/dealer recommending municipal bonds which it owns in inventory to a discretionary account are examples of what?

Control Persons and Conflicts of Interest


I want a bond that is bought at a discount and matures to its face amount, therefore locking in an investment return. I have a set period of time to invest my money and am concerned about reinvestment risk. What bond should I get?

Zero Coupon Bond


I want the safest of all debt securities and I am very conservative. What would you recommend?

Government bonds, notes or bills


I want tax relief by getting something that is tax exempt at the federal and possibly state level.

Municipal Bond


I want a better rate of return than other conservative options. What debt securities would you recommend?

Corporate Bonds, sucka