Investments: Bonds Flashcards

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1
Q

US Treasury Securities

A

Non taxable at the state and local level

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2
Q

Non marketable securities

A
  • are not easily bought and sold

Series EE/E bonds
Series HH/H bonds
Series I Bonds

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3
Q

Series EE/E Bonds

A
  • $25 minimum purchase, $10000 maximum
  • sold at face value, only on TreasuryDirect
  • Non marketable/non transferable
  • fixed rate at time of purchase
  • interest not subject to federal income taxes until redeemed, may qualify for tax free treatment if redeemed for education expenses.
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4
Q

Series HH/H bonds

A
  • Pay interest semiannually

- have not been issued since 2004

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5
Q

Series I bonds

A
  • inflation indexed bonds issued by the us government
  • I bonds are sold at face value and have no guaranteed rate or return

-interest consists of two parts:

  1. Fixed rate of return
  2. Inflation component that is adjusted every six months.
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6
Q

Marketable US Treasury issues

A

US Treasury Bills
US Treasury Notes
US Treasury Bonds

  • sold in denominations of $100 or more
  • sold on an auction basis with lowest yield winning the auction
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7
Q

US Treasury Bills (T-Bills)

A
  • Maturities less than 1 year

- sold in a discounted yield basis, means they do not pay interest; bonds mature at par value

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8
Q

US Treasury Notes

A
  • have maturities between 2 and 10 years

- interest is paid semi-annually

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9
Q

US Treasury Bonds

A
  • have maturities greater than 10 years

- interest is paid semi-annually

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10
Q

Original Issue Discount (OID)

A
  • bond issued at a discount from par value.
  • zero coupon bonds is an example - $1000 par value zero coupon bond may sell for $600. Increases over life of bond and sold at par value.
  • zero coupon bond - bond holder must recognize income each year even if no income was received. “Phantom income”
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11
Q

Treasury Inflation Protected Securities (TIPS)

A
  • provide inflation and purchasing power protection.
  • par value adjust for inflation, coupon rate is applied to the new par value
  • coupon rate does not change
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12
Q

Separate trading of registered interest and principal securities (STRIPS)

A
  • periodic coupon payments are separated from the bond and each coupon payment, including par value trade separately
  • good for investors looking for low risk, highly liquid, and specific time horizon.
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13
Q

Federal Agency Securities

A

Agency bonds are not backed by the full faith and credit of the US Government.

Exception - GNMA bonds are backed by the full faith and credit of the US government

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14
Q

On Budget Debt - Agency Securities/Bonds

A
  • Government national Mortgage association (GNMA-Ginnie MAE)

- Farmers Home Administration

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15
Q

Off Budget Debt - Agency Securities/Bonds

A

Federal National Mortgage Association (FNMA - Fannie Mae).
Federal Home Loan Mortgage Corporation (FHLMC - Freddie Mac).
Student Loan Marketing Association (SLMA - Sallie Mae).
Federal Farm Credit Banks (FFCB).
Federal Intermediate Credit Banks (FICB).
Federal Home Loan Bank (FHLB).

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16
Q

What agencies offer Mortgage Backed Securities?

A
  • GNMA - Ginnie Mae
  • FNMA - Fannie Mae

Biggest risk is falling interest rates. Mortgages could get repaid early, the bond would get retired early, leaving investors with reinvestment issue

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17
Q

Ginnie Mae - GNMA

A
  • mortgage backed security
  • pool of FHA/VA guaranteed mortgages.
  • each month GNMA distributed interest and principal payments to investors.
  • interest it subject to both state and federal income tax, component that is return of principal is not taxable.
18
Q

FNMA (Fannie MAE) and FHLMC (Freddie Mac)

A
  • mortgage backed securities

- not backed by the US Government

19
Q

What are some corporate bonds?

A

-secured bonds:

Mortgage backed securities, collateral trust bonds, Collateralized Mortgage obligations

-unsecured corporate bonds:

debentures, subordinated debentures, income bonds

20
Q

Collateral Trust Bonds

A
  • backed by asset owned by the company issuing the bonds.
  • asset held in trust by a third part
  • In event of default, bond holders receive asset in trust
21
Q

Collateralized Mortgage Obligations (CMOs)

A
  • investors divided into tranches A-Z by maturity length to determine which investors will receive principal repayment.
  • tranches separated by short, intermediate, & long term.
  • short term tranche receive principal repayment first. Interest distributed pro-rata.
  • meant to mitigate prepayment risk associated with mortgage backed securities
22
Q

Debentures

A
  • simply unsecured debt that is not backed by an asset (unsecured bond)
  • backed on the belief of the creditworthiness that the issuing company will repay the debt.
23
Q

Subordinated debentures

A
  • have a Lower claim on assets than other unsecured debt.

- have more risk because of the lower claim on assets if the company defaults on the bond repayments.

24
Q

Income bonds

A

Interest is only paid when a specific level of income is attained.

Only guaranteed to receive the par value back

25
Q

Bond Rating Agencies

A
  • Moodys and Standard and Poor’s
  • higher the bond rating, the lower the yield.

Analyze a firms:
Liquidity
Total amount of debt
Earnings and stability of those earnings

26
Q

What are Moody’s ratings?

A

Ratings are AAA-C

Aaa-Baa are investment quality bonds

Ba and below are junk bonds

27
Q

What are Standard and Poor’s ratings?

A

Ratings are AAA-D

AAA-BBB are investment quality bonds

BB and below are junk bonds

28
Q

Guaranteed investment Contract (GIC)

A
  • Issued by insurance companies with a guaranteed rate of return.
  • The insurance company agrees to repay the principal and guaranteed rate of return for a period of time
  • Yield is higher than treasury securities.
29
Q

Municipal Bonds

A
  • non taxable at the federal, state and local level if you live in the state.
  • used to finance capital expenditures, for the state or municipality
  • three types of municipal bonds:
  1. General obligation bonds
  2. Revenue bonds
  3. Private activity bonds
30
Q

General Obligation Bonds

A
  • backed by full faith, credit, and taxing authority of the municipality that issued the bond.
  • Municipal Bond
31
Q

Revenue Bonds

A
  • municipal Bond

- backed by the revenue of a specific project

32
Q

Private Activity Bonds

A

-used to finance the construction of stadiums

33
Q

What companies insure Municipal Bonds?

A
  • American Municipal Bond Assurance Corp. (AMBAC)
  • Municipal Bond Insurance Association Corp. (MBIA)
  • insurance company will pay interest/principal amounts if a bond is in default.
34
Q

What are risk to corporate bonds?

A

Default Risk.
Reinvestment Rate Risk.
Interest Rate Risk.
Purchasing Power Risk.

35
Q

What are risk to government Bonds?

A

Reinvestment Rate risk
Interest rate risk
Purchasing power risk

36
Q

Tax Equivalent Yield

A

Yield a taxable corporate bond would need to pay to be equivalent to the yield of a tax- exempt muni.

37
Q

Tax-Exempt Yield

A

After tax rate of return a taxable corporate bond pays

38
Q

How to calculate tax equivalent yield and tax exempt yield?

A
39
Q

Tax equivalent yield & Tax Exempt yield example

A
40
Q

When is a Muni Bond double tax free?

A

Bond holder must live in the state that issued the municipal bond.

41
Q

When is a muni bond triple tax free?

A

Bond holder must live in the local municipality that issued the bond.

42
Q

How to calculate tax exempt yield for double tax free bond:

A

-only use this formula if client itemizes deduction in their return!!!!!

If they don’t itemize just add the state and local taxes together and use that for marginal rate