Flashcards in Section 103 Unit 2a Deck (37):
Three ways a Bond is issued
Registered - payments will be made to the owner of record
Bearer Form - Payments will be made to whoever holds or possesses the bond
Book-entry form - Has its record ownership held electronically in a central depository
The format agreement, or contract, between the bond issuer and the trustee.
Bond's face value, or the amount of principal that the bond owner or holder will receive at the time of maturity.
Coupon Rate or Nominal Yield
The stated annual interest rate that will be paid each period for the term of the bond and is stated as a percentage of the par value of the bond.
For CFP Exam Purposes
Frequency of Bond Interest Payments
Frequency is Semiannual
Par Value $1,000
Is a measurement of bond's yield and is equal to 1/100 of 1% of yield. For example, a bond that increases in yield by 2% is said to increase by 200 basis points.
Yield to Maturity (YTM)
Is the average annualized rate of return (internal rate of return) that an investor will earn if the bond is held to its maturity date. This return takes into account both the current market price of the bond and any capital gains (or losses) on the bond.
Selling at a Discount
When the bond price in the secondary market is less than the bond's par value.
Original Issue Discount
When a bond is issued at a discount.
Selling at a Premium
When the bond price in the secondary market is more than the bond's par value.
If included in the bond indenture, it allows the issuer to pay off the bond principal after a specified period, usually at a stipulated price higher than par value.
Yielt to Call (YTC)
The yield of the bond, assuming the bond is called on the first available call date
(Usually at least 10 years after the date of issue)
Such as a mortgage bond or collateral trust bond, pledges specific assets that may be sold by the bond purchaser in the vent that the bond issuer defaults in paying either the interest or principal on the bond.
Debenture or Unsecured Bond
Is a bond that promises payments of interest and principal but pledges no specific assets
Investment Grade Bond
A bond that is rated BBB- or higher by the Standard & Poor's rating service. A high quality bond with little risk of default by issuer.
Referred to as a junk bond. Rated BB+ or lower by the Standard & Poor's rating service. Low quality bond with a higher risk of default by the issuer.
A bond with a feature to convert the bond into equity at a later time. Turn in the bond to the issuer in exchange for a specified number of common stock shares of the issuer.
A bond that pays its par value at maturity, but has no periodic interest payments. It is issued at a deep discount from the par value (OID). For tax purposes, they must recognize the accrued interest each year for income purposes, phantom income.
Relationship Between Bond Prices and Interest Rates
When interest rates rise above the current bond interest rate the price drops. This is because your bond becomes less desirable in the market because the interest is lower in comparison.
U.S. Treasury Notes
Issued at their stated par value and provide semiannual coupon payments. Purchased in increments of $100. Maturity no more than 10 years. State and local tax exempt. For federal income tax purposes, all interest from either obligation is taxable at ordinary income tax rates in the year earned.
U.S. Treasury Bond
Issued at their stated par value and provide semiannual coupon payments. Purchased in increments of $100. Maturity no more than 30 years. State and local tax exempt. For federal income tax purposes, all interest from either obligation is taxable at ordinary income tax rates in the year earned.
U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities)
Are zero coupon bonds created by separating the semiannual coupon payments and the principal repayment portion of a U.S. Treasury note or bond. Interest on a STRIP is taxed as ordinary income as it accrues, even though no actual interest is paid until the bond matures (or is sold). Phantom income.
Treasury Inflation Protected Securities (TIPS)
Marketable securities whose principal is adjusted by changes in the Consumer Price Index (CPI). Issued in terms of 5, 10, and 30 years. The coupon rate remains the same for the life of the security, but the amount of the coupon payment changes on the basis of the inflation-adjusted principal or par value. At maturity, an investor will receive the greater of the original principal or the adjusted principal.
Taxation of TIPS
All interest received is taxed as income tax. Only federally, never state or local.
Series EE Savings Bond
Replaced Series E bond in 1980. Rates for new bonds are adjusted semiannually. Once purchased, you are locked into a rate. The value of the bond is guaranteed to double after twenty years. Interest is not taxable until maturity. The bond must be held for twelve months minimum and three-month interest penalty is assessed if the bond is redeemed within five years of issue.
Series H or HH Bond
Series H bond was replaced by Series HH in 1980. Could only be obtained by exchanging Series E/EE into an H/HH. Series H/HH bonds were discontinued in 2004.
Series I Savings Bond
An inflation-protected debt security. Accrues interest over time with the feature of income tax deferral. The interest rate is a combination of two separate rates:
A fixed rate of return that remains the same for the life of the bond
A semiannual inflation rate based on changes in the CPI during the previous six-month period.
Taxation of Saving Bonds
The interest accrued or received on Series E/EE, H/HH, and I bonds is exempt from income taxation by states and other municipalities regardless of the use of the bond’s proceeds.
Farm Credit Administration
Provides American agriculture with a source of credit. Securities back by federally insured loans
Government National Mortage Association (Ginne Mae)
Guarantees investors the timely payment of principal and interest on mortgage-backed securities back by federally insured loans
Federal Home Loan Mortgage Corporation
Purchases mortgage loans and mortgage-related securities for investment and issues guaranteed mortgage-related securities. (Private corporations, but backed by the U.S. Government) Taxable by every level
Federal National Mortgage Association (Fannie Mae)
Keeps funds flowing into the mortgage market, helps distressed homeowners, and encourages sustainable lending. (Private corporations, but backed by the U.S. Government) Taxable by every level
Student Loan Marketing Association (Sallie Mae)
Offers solutions that help families save, plan, and finance college expenses. (Private corporations, but backed by the U.S. Government) Taxable by every level
Federal Housing Finance Agency
In 2008 took over Fannie Mae and Freddie Mac and will take necessary action to restore the firms and will disband once completed.
Ginne Mae Certificates
Buys Federal Housing Admin and Department of Veteran Affairs mortgages and auctions them to private lenders, which pool mortgages to certificates for sale to investors. The minimum certificate is $25,000. Because many mortgages don't last full term (because of they refinance or pay early) yield quotes are based on a 12-year prepayment assumption. Traded over the counter
Freddie Mac Certificates
Publicly held corporation that purchases conventional mortgages from financial institutions and repackages them into mortgage-backed securities for sale to investors