Types Of US Treasuries and Investnent funds

Question 1

Series E and EE Bonds

Answer 1

Sold at face value
Non-marketable, nontransferable

Do NOT pay interest periodically

Interest earned on EE bonds can be tax-free for college if used on qualified education expenses

Question 2

Series I Bonds

Answer 2

Inflation protection via fixed rate + variable rate

Don’t pay interest periodically

Question 3

TIPS

Answer 3

Principal adjusts for inflation, apply coupon rate to new principal amount

Coupon rate does NOT change like they do on
I Bonds

Question 4

STRIPS

Answer 4

Separate trading of coupon payments and principal amount

Creates many zero coupon bonds

Question 5

US Treasuries Maturity types

Answer 5

Bills = <1 year

Notes = 2 - 10 years

Bonds = greater than 10 yrs

All US Treasuries are
non-taxable at state and local

Question 6

Which Federal Agency Security is backed by faith and credit of US Govt?

Answer 6

GNMA - Ginnie Mae

Govt Natl Mortgage Association

Question 7

Which Federal Agency securities are NOT backed by US Govt?

Answer 7

Federal Natl Mortgage Association
(FNMA Fannie Mae)

Fed Home Loan Mortgage Corporation
(FHLMC Freddie Mac)

Student Loan Marketing Association
(SLMA Sallie Mae)

Question 8

Private Activity Bonds

Answer 8

Used to fund construction of sports stadiums

Question 9

Muni Bonds Tax Status

Answer 9

Not taxed at Fed, State, and Local level if you live in issuing state

Bonds issued by US territories (puerto Rico) are not subject to Fed, State, and Local Tax

Question 10

Tax Equivalent Yield

Answer 10

TEY= r / (1-t)

r = tax exempt yield
t = marginal tax rate

Question 11

After-Tax Yield

Answer 11

=(Corporate Bond rate) x (1-marginal tax rate)

Question 12

Tax rate is 35%, corporate bond yields 8.5% and Muni yields 5.25%. Which would you recommend?

Answer 12

After tax yield =
8.5% x (1-0.35) = 5.525%

TEY= 5.25% / (1-0.35) = 8.07%

Pick the corporate bond since its after-tax yield is higher than the Muni’s TEY

Question 13

What’s the TEY on a Treasury paying 3.5% if Marginal Federal tax rate is 35% and state income tax is 5%?

Answer 13

= 3.5% / (1-0.05) = 3.68%

You wanna put the Tax you DON’T have to pay in the denominator
(state tax in this case since it’s a Treasury)

Question 14

Current Yield

Answer 14

Annual payment in dollars divided by current price of bond

= annual payment / current market price

CY= C / P

Question 15

Coupon Rate

Answer 15

Annual payment in dollars divided by par value

If bond pays $100 per year with par value of $1,000, then coupon rate
= $100/ $1,000 = 10%

Question 16

Bought bond for $880 with 9% coupon. You sold it after 1 year when it’s paying a current yield of 10%. What’s the Holding Period Return?

Answer 16

HPR=
(Sell price - PP +/- CF) / PP

(SP - 880 + 90) / 880

CY = C / P
P = C / CY = 90 / .10 = 900

(900 - 880 + 90) / 880 = 12.5%

Question 17

Yield Curve Theories: Market Segmentation Theory

Answer 17

Yield curve depends on supply and demand at a given maturity

Question 18

Yield Curve Theories: Liquidity Preference Theory

Answer 18

Yield curve has lower yields for shorter maturities because investors prefer liquidity and are willing to pay for it in form of lower yields

Question 19

Yield Curve Theories: Expectations Theory

Answer 19

Yield curve reflects investors inflation expectations.

Since investors are uncertain or believe inflation will be higher in future, long term yields are higher

Question 20

How do you immunize a bond portfolio from interest rate risk and reinvestment rate risk?

Answer 20

Maintain duration equal to investor’s time horizon

Zero coupon bond always has a duration equal to its years to maturity

Question 21

Bond Duration

Answer 21

Bond price sensitivity to changes in interest rates

Higher is more sensitive

Weighted average time until you receive all coupon payments and principal

Larger coupon payments means Shorter Duration and vice versa

Longer maturity has higher duration

Question 22

Change in Bond Price formula with changes in interest rates

Answer 22

Change of P =

-D x (change of Y / (1+Y))

Question 23

Bond has 1,000 par, 5 years to maturity, 6% annual coupon. YTM is 8% and it’s selling for $920.15 and Duration is 4.4 years. What’s the new price if interest rates decrease by 0.5%?

Answer 23

= -4.4 x [ -0.005 / (1+.08)]

= 2.04%

New price is
$920.15 x 1.0204 = $938.92

Question 24

Convertible Bond Formula

Answer 24

CV= (Par / CP) x Ps

Ps is stock price
CP is conversion price

Question 25

Bought bond for $1,050. Conversion price is $40 and market price of common stock is $35. What’s the conversion value of the bond?

Answer 25

= (1,000 / $40) x $35

= $875

Question 26

Property Valuation formula

Answer 26

= NOI / Cap Rate

NOI = Net income + Depreciation + Interest expense

Net Income = Total Income - All Expenses (Dep. Interest)

Question 27

NOI Formula

Answer 27

= Net Income + Dep. + Int.

Net income is Income - fixed and variable expenses
(Mortgage payment including its interest, and depreciation are NOT operating expenses)

or NOI = Gross income - Operating expenses
(Vacancy rate reduces gross income!)

Question 28

Condo has $2M in rent annually. Expenses are $300k in maintenance, $500k in salaries, $200k in utilities, $250k depreciation, $250k mortgage payments where $200k is proncipal and $50k is interest expense. Assume 10% required rate return, how much would investor be willing to pay for property?

Answer 28

$2M - $300k - $500k - $200k
= $1,000,000

$1,000,000 / 0.10 = $10M

Don’t include depreciation and mortgage payment expense

Question 29

Unit Investment Trust

Answer 29

Can be fixed income or equity

Usually are fixed income

Self-Liquidating**

Passive management, no trading of assets w/in the trust

Units, NOT Shares

Question 30

REIT’s How do they maintain Tax Exempt status?

Answer 30

Must distribute 90% of investment income to shareholders

REITs are also similar to a closed end mutual fund

Question 31

3 Types of REITs?

Answer 31

Equity: Invest in real estate for capital appreciation
Income is generated from rental income and appreciation

Mortgage: Invest in mortgages and construction loans. Make the spread between the lending and borrowing rate

Hybrid: combo of both above

Question 32

REITs: Attractive because?

Answer 32

Has low correlation with stock market

Question 33

ADRs

Answer 33

Foreign stock held in domestic bank

DO NOT eliminate exchange rate risk

Capital gains in ADRs include currency fluctuation

Trade on US exchanges, denominated in US dollars and trade in US $$

Dividends are paid in USD