Debt Securities

Question 1

Corporate Bonds are designed for what

Answer 1

bond
max income
RISK: interest rate
provides income - semi-annually

Question 2

What is the nominal rate

Answer 2

the coupon rate

Question 3

How do I determine the Current Yield

Answer 3

Annual Income / CMY = CY

Question 4

BDs require you to disclose what

Answer 4

the “Yield to Worst” - either YTmor YTC (lowest possible yield investor could receive)
when adding/subtracting profit/loss when held to maturity = YTM
when adding/subtracting profit/loss when called away = YTC

Question 5

What is a call provision

Answer 5

When the issuer recalls (refunds or refis) bond
good for the issuer - highest interest rate, lowest cost will most likely to be refunded
RISK: CALL risk, needing to reinvest principal

Question 6

Zero coupons

Answer 6

trade flat, because they are issued at a discount and therefore have no reinvestment risk

Question 7

What is book entry/journal entry

Answer 7

no physical certificate

majority of gov’t securities issue this way

Question 8

How are bonds quoted

Answer 8

Term /Corporate = Dollar Bond
     - quoted in % of par
Serial / ONLY Munis
      - quoted on basis (YTM)
Interest / Zero Coupon = pay for college
     - buy at discount, hold to maturity
     - long term
      - taxed at ordinary income ANNUALLY
      - straight line accretion
      - RISK: inflation, most int rate sensitive

RISK: reinvestment risk, interest rate sensitive

Question 9

How does interest accrue in bonds

Answer 9

Corps/Munis
      - 30/360 (accrues over weekend)
      - t+2, up to day before settlement
Gov't Securities
      - actual days
      - T+1, up to day before settlement
      - Feb is always 28 days

Settlement doesn’t include weekends, accrued interest does

Question 10

What is the liquidation priority in Bonds

Answer 10

1. Wages
2. IRS - taxes
3. Creditors
   
   • Secured
   • Unsecured
4. Equity
   
   • Preferred
   • Common

Question 11

What is a EUROdollar CD/Bond

Answer 11

Non-Us issued bond or CD to attract US investors
All done in US $s, P&I paid in US $
NO currency risk

Question 12

What is a EURO bond

Answer 12

bond that pays in foreign currency and can be issued by anyone
RISK: currency risk to US investors

Question 13

If you purchase a bond from a foreign entity and they have you pay tax you are elgible for

Answer 13

a Foreign Tax Credit

Question 14

What is an ELN

Answer 14

Equity Linked Note - bond/debt instrument

affected by a rating downgrade

Question 15

What are CMOs

Answer 15

investments backed by other assets
taxed federally and state
interest paid monthy

Question 16

What has the least amout of reinvestment risk when looking at CMOs

Answer 16

PACs - planned ammoritization