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Series 65 > Unit 13: Fixed Income > Flashcards

Unit 13: Fixed Income Flashcards

1
Q

What is a Bond Indenture?

A

Document with terms of the loan
AKA deed of trust

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2
Q

What is Debt Capital?

A

Long term debt financing - min 5 years

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3
Q

What are the 5 types of Government Securities?

A
  1. T-bills
  2. Treasury Notes
  3. Treasury Bonds
  4. TIPS- Treasury Inflation Protected Securities
    5.GNMA (Ginnie Mae) Securities
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4
Q

What are Treasury Bills?

A

A Government Security
issued every week for periods of 4,8,13,and 26 weeks
issued every 4 weeks for 52 week bills
pay no interest - issued at a discount of par value
highly liquid “risk free” investment

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5
Q

What are Treasury Notes?

A

A Government Security
Noncallable, mature @ par value
pay semi annual interest - % of par value
matures at 2,3,5,7,10 years

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6
Q

What are Treasury Bonds?

A

A Government Security
Noncallable, mature @ par value
pay semi annual interest - % of par value
matures 10-30 years

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7
Q

What is considered Par value of Govt securities on the exam?

A

$1000

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8
Q

What are TIPS- Treasury Inflation Protected Securities?

A

A Government Security
Protects against purchasing power risk
Fixed interest rate
Matures 5,10, 30 years
principal afjusted semi annually for inflation equal to change in CPI
Interest subject to fed tax, but not state/local tax

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9
Q

What are GNMA securities?

A

Ginnie Mae
represent an interest in a pool of FHA-insured mortgaged or Vet Admin guaranteed mortgages
Pass through of mortgage payments: Monthly payments of interest and principal
Min $25K investment, sold in $1000 increments

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10
Q

What are FNMA securities ?

A

Fannie Mae
like Ginnie Mae, but not federally backed

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11
Q

What is the Tennessee Valley Authority?

A

The nation’s largest power provider
Not technically backed by US government
It’s a corporation owned by the US government

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12
Q

What are the benefits of investing in mortgage backed securities?

A

May pay a higher rate of return than other debt securities w/ similar ratings

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13
Q

What are the risks of investing in mortgage backed securities?

A

complicated/difficult to understand
prepayment risk - mortgages may be refinanced when rates drop
default risk - subprime mortgages
reinvestment risk
liquidity risk

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14
Q

How are Bonds priced?

A

Corporate & Municipal Bonds
%of par : 100% = $1000
for Corporate and Muni Bonds: 1 point = $10
for Government Bonds: 1 point = $10 and each .1 pt - 1/3

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15
Q

What would a bond listed like this mean: DEF 5s35 @106

A

DEF= issuer
5=rate
35=maturity (2035)
106 = price ($1060)

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16
Q

What is secured vs. unsecured debt?

A

Secured: Debt backed by various assets
Unsecured: Debt backed only by reputation, credit record, and financial stability of the corporation

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17
Q

What are mortgage bonds?

A

Bonds backed by property

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18
Q

What are Equipment Trust Certificates?

A

Bonds backed my rail cars or airplanes
(Airlines and railroad companies)

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19
Q

What are Collateral Trust Bonds?

A

Bond backed by securities used as collateral

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20
Q

What are Debentures?

A

Unsecured - only backed by word credit worthiness

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21
Q

What are Guaranteed Bonds?

A

Bonds guaranteed by a corporate entity other than the issuer

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22
Q

What are Senior Bonds?

A

Secured bonds that have prior claim ahead of unsecured creditors

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23
Q

What are Subordinate Bonds?

A

Bonds below senior bonds

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24
Q

What are the S&P Bond Ratings?

A

AAA,AA,A,BBB,BB,B,CCC,C,D

25
Q

What are the Moody’s Bond Ratings?

A

Aaa, Aa, A, Baa, B, Caa, Ca, C

26
Q

What are considered investment grade bonds?

A

Top 4 Ratings

27
Q

What are considered lower grade bonds?

A

Bottom 5 ratings
AKA junk bonds
High Yield Bonds

28
Q

What are municipal bonds?

A

Bonds issued by states/cities

29
Q

What are the benefits of investing in muni bonds?

A

Usually no federal taxes on interest, no state taxes if you live in the state it’s issued
Second only to Fed issued bonds in terms of safety
Sometimes they are insured

30
Q

What are General Obligation Bonds?

A

Muni Bonds usually backed by taxes

31
Q

What are Revenue Bonds?

A

Muni Bonds payable from earnings of revenue-producing enterprises (water, sewer, electric, schools, airports, etc.)

32
Q

What is the Tax Equivalent Yield (TEY)?

A

municipal bond coupon/ (100%-inv.tax bracket)

33
Q

What are the advantages of investing in Foreign Bonds?

A

Potentially Higher Returns
Diversification
Hedging against drop in US dollar

34
Q

What are the risks of investing in Foreign Bonds?

A

Potentially higher risk of default
less liquidity
higher trading costs

35
Q

What are Eurobonds?

A

Any long term debt issued and sold outside the country of the currency in which it is denominated

36
Q

What are Eurodollar Bonds?

A

Bonds stated in US dollars, issued by a non US company and sold outside the US and the issuer’s country

37
Q

What are the benefits of investing in Eurodollar Bonds?

A

Not registered with the SEC: lower issuance cost
No currency risk
Rated by US agencies
May off higher yield

38
Q

What are the risks of investing in Eurodollar Bonds?

A

Lack of transparency b/c not registered with SEC
political and country risk
less liquid than domestic securities

39
Q

What is a Yankee Bond?

A

a Eurodollar bond issued in the US

40
Q

What are Brady Bonds?

A

US partnered with IMF & World Bond to buy defaulted commercial bank loans in less developed countries

41
Q

What are Zero Coupon Bonds?

A

Bonds issued at a discount from par (like T-bills)
No interest is paid. Par value is paid out at maturity.
More volatile than other bonds
“Phantom Income”- tax paid each year as if earnings were paid out

42
Q

What are Callable Bonds?

A

A callable bond is sold with the provision that the issuer might pay it off before it reaches maturity. If interest rates fall, the company or municipality that issued the bond might opt to pay off the outstanding debt and get new financing at a lower cost.

43
Q

What is Call protection?

A

Disclaimer on callable bonds that lays out the number of years before a bond can be called back

44
Q

What are convertible bonds?

A

Can be converted to stock in the company
Call provision- can force investors to convert
Issued by corporations only

45
Q

What is Parity Value?

A

When the convertible bond and the common stock you would get at conversion are equal in value

46
Q

What are the benefits and downsides of investing in convertible bonds?

A

Benefit: Can participant in company’s growth by converting to stock
Downside: lower interest rate

47
Q

What is the nominal yield of a bond?

A

The coupon rate

48
Q

What is LIBOR?

A

London Interbank Offered Rate
World’s most widely used benchmark for short term interest rates

49
Q

What is a DDA account?

A

Demand Deposit account AKA a checking account

50
Q

If a client’s goal is capital preservation with no risk, what investments would you recommend?

A

Insured Bank CDs

51
Q

What are Negotiable CDs?

A

Jumbo CD- atleast $10K, most often over $1 mil
Issued by banks. Can be sold in secondary markets

52
Q

What are CDs?

A

A certificate of deposit (CD) is a savings product that earns interest on a lump sum for a fixed period of time. CDs differ from savings accounts because the money must remain untouched for the entirety of their term or risk penalty fees or lost interest. CDs usually have higher interest rates than savings accounts as an incentive for lost liquidity.

53
Q

What is Yield to Call?

A

The total return that will be received if the bond purchased is held only until its call date instead of full maturity.
Generally, the earlier a bond is called, the better the return for the investor.

54
Q

What is Yield to Maturity?

A

The total return that will be paid out from the time of a bond’s purchase to its expiration date.

55
Q

What is duration, in relation to bonds?

A

The measurement of time it takes for the cash flow (interest pymts) to repay the principal
Duration measures a bond’s or fixed income portfolio’s price sensitivity to interest rate changes.
Most often, when interest rates rise, the higher a bond’s duration, the more its price will fall.
Time to maturity and a bond’s coupon rate are two factors that can affect a bond’s duration.

56
Q

What is convexity?

A

Convexity is a risk-management tool, used to measure and manage a portfolio’s exposure to market risk.
Convexity is a measure of the curvature in the relationship between bond prices and bond yields.
Convexity demonstrates how the duration of a bond changes as the interest rate changes.
If a bond’s duration increases as yields increase, the bond is said to have negative convexity.
If a bond’s duration rises and yields fall, the bond is said to have positive convexity.

57
Q

Yield rankings from lowest to highest

A

Discount
Nominal
CY
YTM
YTC
Premium is opposite

58
Q

What is a bond’s current yield?

A

A bond’s current yield is an investment’s annual income, including both interest payments and dividends payments, which are then divided by the current price of the security.

59
Q

What is Discounted Cash Flow?

A

a valuation method that estimates the value of an investment using its expected future cash flows.
DCF analysis attempts to determine the value of an investment today, based on projections of how much money that investment will generate in the future.

Series 65 (18 decks)

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