Section 103 Unit 2b Flashcards Preview

CFP > Section 103 Unit 2b > Flashcards

Flashcards in Section 103 Unit 2b Deck (16):

Two Types of Municpal Debt Obligations

General Obligation Bonds and Revenue Bonds


General Obligation Bonds (Gos)

Issued to raise money to benefit the community. Interest and obligation must be paid by the revenues of the municipal issuer.


Revenue Bonds

More risky than GOs and, therefore, higher yields. Funds municipal facilities that generate sufficient income to pay back the bonds plus interest.


Private Activity or Private Purpose Bonds

Is part of a state or local government bond issue for which more than 10% of the proceeds of the issue are to be used for a private business use.


Insured Municipal Bonds

Municipal bonds may insure against default to help increase the bond rating, which will lower the coupon rate on the issue.


Municpal Bond Taxes

GOs and Revenue bonds interest is not subject to federal taxes but if the bond is sold the gains are. Taxable on state and local levels, unless the bond is purchased by a resident of the issuing state and the bond indenture agreement allows for that exclusion.


Taxable Equivalent Yield Formula

TEY= Municipal Coupon rate/ 1 - marginal tax rate


After-Tax Yield Formula

After-tax yield = Pretax return x (1 - marginal tax rate)


Convertible Bonds

Convert to a fixed number of shares of company stock. Pay lower interest rate than nonconvertible bonds. The price for convertible is less volatile than common stock.


Conversion Ratio

The stock price at which a convertible bond can be exchanged for shares of the issuer's common stock

Conversion ratio = Par value of convertible security / conversion price

The higher the conversion price, the less the shares are received at the date of conversion.


Conversion Value Formula

Conversion value - conversion ratio x market price of common stock.
The conversion value represents the value of the bond if it were converted on the basis of current market conditions.


Zero-Coupon Bonds

Sold at a deep discount aka Original Issue Discount (OID). Phantom income taxable.


Types of Foreign Bonds

1) Those payable in U.S. Dollars
2) Those payable in foreign currency (exchange rate risk)


Yankee Bonds

Foreign bonds payable in U.S. Dollars.


Eurodollar Bonds

U.S. dollar paid bond, but do not have to be registered with the SEC because they are issued and traded outside the U.S.


Promissory Note

A promise to pay a specific sum of money or a series of payments to others. Same as Bonds. Present value of a promissory note is found using TVM principles and discounting back future cash flows.