UNIT 2 Flashcards
1
Q
BOND ISSUERS
A
.CORPORATE, FEDERAL GOVT, AND MUNICIPAL GOVT
2
Q
PAR VALUE OF A BOND IS ALWAYS
A
$1000 UNLESS OTHERWISE STATED
3
Q
ANOTHER TERM FOR PAR VALUE IS
A
THE PRINCIPAL OR FACE VALUE
4
Q
MATURE DATE
A
THE DATE THE INVESTOR RECEIVES THE LOAN PRINCIPAL BACK
5
Q
COMMON MATURITIES ARE IN THE RANGE OF
A
5-30 YEARS
6
Q
TERM BOND
A
STRUCTURED SO THAT THE PRINCIPAL OF THE WHOE ISSUE MATURES AT ONCE
7
Q
SINKING FUND ACCOUNT IS USED BY
A
TERM BOND ISSUERS TO ACCUMULATE MONEY TOO RETIRE THE BONDS AT MATURITY
8
Q
SERIAL BOND
A
SCHEDULES PORTIONS OF THE PRINCIPAL TO MATURE AT INTERVALS OVER A PERIOD OF YEARS UNTIL THE ENTIRE BALANCE IS REPAID
9
Q
BALLOON BOND
A
THE ISSUER REPAYS PARTOF THE BOND’S PRINCIPAL BEFORE THE FINAL MATURITY DATE, BUT PAYS OFF THE MAJOR PORTION OF THE BOND AT MATURITY; SERIAL AND BALLON
10
Q
THE TERM SERIES OFTEN REFERS TO TYPES OF
A
SAVINGS BONDS
11
Q
THE COUPON ON A BOND REPRESENTS
A
THE INTEREST THE ISSUER HAS AGREED TO PAY THE INVESTOR
12
Q
THE INTEREST RATE OF THE BOND IS CALLED THE
A
COUPON RATE
13
Q
THE COUPON RATE IS ALSO CALLED THE
A
STATED YEILD OR NOMINAL YEILD
14
Q
HOW IS THE COUPON RATE CALCULATED?
A
FROM THE BOND’S PAR VALUE, STATED AS A PERCENTAGE OF PAR; (COUPON% x PAR) = COUPON RATE
15
Q
WHAT HAPPENS IF THE BOND TRADES BETWEEN COUPON PAYMENTS?
A
THE NEW OWNER MUST PAY THE OLD OWNER THE AMOUNT OF INTEREST EARNED TO DATE AT THE TIME OF THE SETTLEMENT
16
Q
THE BUYERS OF ZERO-COUPON BONDS DO NOT PAY ACCRUED INTEREST BECAUSE THEY ARE
A
NOT INTEREST BEARING
17
Q
THE BUYERS OF ZERO-COUPON BONDS DO NOT PAY ACCRUED INTEREST BECAUSE THEY ARE
A
NOT INTEREST BEARING
18
Q
ACCRUED BOND INTEREST IS PAID ON A
A
SEMIANNUAL BASIS
19
Q
ONCE A BOND IS TRADING IN SECONDARY MARKETS, IT CAN TRADE AT A
A
1: PRICE OF PAR
2: PREMIUM OF PAR
3: DISCOUNT OF PAR
20
Q
BOND PRICING IS MEASURED IN
A
POINTS
21
Q
EACH BOND POINT EQUALS
A
1% OF FACE VALUE/ PAR
22
Q
BOND PRICES WILL RISE AND FALL WITH THE FLUCTUATION OF
A
INTEREST RATES
23
Q
BOND PRICES HAVE AN ______ RELATION TO INTEREST RATES
A
INVERSE
24
Q
A BOND’S YEILD EXPRESSES
A
THE CASH INTEREST PAYMENTS IN RELATION TO THE BOND’S VALUE
25
A BOND'S YEILD IS DETERMINED BY
1: ISSUERS CREDIT QUALITY
2: PREVAILING INTEREST RATES
3: TIME TO MATURITY
4: ANY FEATURES THE BOND MAY HAVE
26
NOMINAL YEILD
STATED YEILD; IS SET AT THE TIME OF ISSUE
27
CURRENT YEILD
MEASURES A BOND'S ANNUAL INTEREST PAYMENT RELATIVE TO ITS MARKET PRICE; ANNUAL COUPON PAYMENT DIVIDED BY MARKET PRICE = CURRENT YEILD
28
YEILD TO MATURITY
REFLECTS THE ANNUALIZED RETURN OF THE BOND IF HELD TO MATURITY
29
calculating yield to maturity
the difference between the price that was paid for a bond and par value received when the bond matures
30
if the bond was purchased at discount
the investor makes money at maturity
31
if the bond is purchased at premium
the investor loses money at maturity
32
yields are measured in
basis points
33
a basis point is
a measurement of yield equal to 1/100 of 1%
34
yield to maturity is sometimes called a bond's
basis
35
a bond trading at 5.83 basis means the bond has a YTM of
5.83%
36
yield to call
a bond will a call feature may be redeemed before maturity at the issuer's option; investor receives principal soon than anticipated
37
yield to call calculations reflect
early redemption premium loss or discount gain
38
paying "100" means they paid what percentage of par
100%
39
a 6% corporate bond trading on a 7% basis is trading
at a discount
40
THE 3 MAJOR CREDIT RATING AGENCIES
1: FITCH RATINGS INC.
2: MOODY'S INVESTORS SERVICE INC.
3: STANDARD AND POOR'S RATING SERVICE
41
A.M. BEST CO. INC. IS HISTORICALLY ASSOCIATED WITH
RATING INSURANCE COMPANIES ABILITY TO PAY CLAIMS AND THEIR DEBT ISSUES
42
DEBTS QUALITY =
SAFETY
43
INVESTMENT GRADE BONDS ARE RATED
BBB OR Baa AND HIGHER
44
INVESTMENT GRADE BONDS HAVE _____ LIQUIDITY RATES THAN NON-INVESTMENT BONDS
HIGHER
45
THE HIGHER THE BOND RATING,
THE LOWER THE YIELD
46
LOWER- GRADE BONDS ARE REFFERED TO AS
JUNK BONDS; HIGH YIELD
47
the less credit-worthy the borrower,
the more risk to the lender
48
rating organizations rate bonds issues that
1: have been paid to be rated
2: have enough shares outstanding to be rated
49
a bonds sensitivity to interest rates is called its
volatility
50
the more a bond moves in response to interest rates is said to be more
volatile
51
the more time left to maturity
the more volatile because its due to fluctuate with interest rates
52
the lower a bond's coupon rate
the more volatile it is
53
the lower a bond's coupon rate
the more volatile it is
54
duration
a way of measuring a bond's volatility that combines maturity and coupon rates
55
a higher duration means
a more volatile price
56
features attached to a bond
1: call feature
2: put feature
3: convertible feature
57
call feature of a bond
allows an issuer to call a bond before maturity
58
when do issuers use the call feature of a bond?
when interest rates are plummeting
59
put feature of a bond
opposite to call feat; investor can put the bond back to the issuer before it matures
60
when do investors use the put feature of a bond?
when interest rates are high
61
convertible feature of a bond
issued by corporate issuers; allowing the investor to convert the bond into shares of common stock; exchange debt for ownership
62
when bonds have features that benefit the issuer, thy typically have
higher coupon rates to appear desirable to investors
63
zero coupon bonds
issuer's debt obligations that do not make regular interest payments
64
zero coupon bonds are sold
at a deep discount and mature at par
65
zero coupon bonds are _____ volatile than other bonds with similar maturities
more
66
zero-coupon bonds are issued by
1: corporations
2: municipalities
3: the U.S. treasury
4: broker-dealers
67
zero coupon bonds issued by a broker dealer are called
treasury receipts
68
broker- dealer zero coupon bonds are built from
a basket of t bonds
69
U.S. treasury issued zero coupon bonds are called
STRIPS
70
unlike STRIPS, a treasury receipt is
not backed by the full faith and credit of the treasury
71
though the interest is paid at maturity, owners of zero-coupon bonds
have to pay taxes on the interest annually
72
"phantom income" is also known as
annual accretion of the discount on a zero-coupon bond; taxes due annually
73
secured corporate bonds are back by
various kinds of assets owned by the issuer
74
unsecured corporate bond debt is back by
the reputation, credit record, and financial stability of the issuer
75
backed by a company's full faith and credit refers to
unsecured corporate bonds
76
types of secured corporate bonds
1: mortgage bonds
2: equipment trust certificates
3: collateral trust bonds
77
mortgage bonds
collateral backed by a corporations real estate and physical assets
78
equipment trust certificates
financing the acquisition of capital equipment used in the course of business; obligation to pay the investor is secured by equipment
79
collateral trust bonds
depositing corporate securities into a trust to serve as a collateral for lenders
80
types of unsecured debt
1: debentures
2: guaranteed bonds
3: income bonds
4: subordinated debt
81
debentures
a debt obligation by the corporation backed only by its word and general creditworthiness; written contracts to pay principal on due date and interest on a regular basis
82
guaranteed bonds
backed by a company other than the issuing corporation, such as a parent company; if the issuer defaults, the guarantee has to step in
83
income bonds
adjustment bonds; used when a company is reorganizing and coming out of a bankruptcy
84
if an investor is seeking income an ____ bond seems like the wrong investment
income
85
subordinated debt
belonging to a lower or inferior class or rank; secondary; junior to
86
no matter how subordinated a debenture is, its still
senior to any stockholder
87
order of liquidation
1: secured debt holders
2: unsecured debt (debentures) and general creditors
3: subordinated debt
4: preferred stockholders
5: common stockholders
88
administrative claim holders/ administrative claimants
attorneys, the courts, property appraisers, auctioneers, and liquidators
89
administrative claim holders help assist in
liquidation; paid after secured debt but before unsecured debt
90
benefits of owning debt securities
1: income
2: safety
91
risks of owning debt securities
1: default
2: interest rate risk
3: purchasing power risk (inflation)
92
debt securities have much less price volatility than
stocks
93
the worst outcome of owning a bond is
defaulting
94
the default risk in debt backed by the U.S. treasury is
effectively zero
95
what are the safest investment for U.S. investors?
treasury backed securities
96
purchasing power risk
inflation; as the price of things change overtime the fixed rate of a bond stays the same and doesn't account for inflation
97
municipal bonds
securities issued by state or local govt, U.S. territories and special districts for the purpose of public works and construction projects
98
interest on most municipal bonds is
tax free on a federal level and tax free on a state level if the investor lives in the state of issuance
99
two categories of municipal bonds
1: general obligation bonds
2: revenue bonds
100
general obligation municipal bonds
issued for capital improvements that benefit the entire community; typically do not produce revenues
101
principal and interest of general obligation municipal bonds are paid by
taxes collected by the municipal issuer
102
general obligation bonds are known as full
faith and credit issues and are backed by the municipality's taxing power
103
the amount of debt a municipal govt may incur is
limited by state or local statutes to protect taxpayers from excessive taxes
104
debt limits make bonds safe for
investors
105
general obligation municipal bonds are often associated with requiring
voter approval
106
revenue bonds
self-supporting debt; ; used to finance any municipal facility that generates sufficient income; principal and interest payments are made exclusively from revenues generated by the project or facility for which the debt was issued
107
examples for revenue bonds
utilities, housing, transportation, education, health, industrial, sports
108
authorities
issuer of revenue bonds from quasi-governmental entities tasked with building roads, tunnels, bridges, and other infrastructure
109
the interest of bonds issued by a territory of the United States is
tax free to U.S. taxpayers
110
short-term municipal obligations/ municipal anticipation notes
short-term securities that generate funds for a municipality that expects other revenues soon; less than 12 month maturities (3 months- 3 years max); repaid when the municipality receives the anticipated funds
111
municipal notes categories
1: municipalities issue tax anticipation notes (TANs)
2: revenue anticipation notes (RANs)
3: tax and revenue anticipation notes (TRANs)
4: bond anticipation notes (BANs)
5: tax-exempt commercial paper
6: construction loan notes (CLNs)
7: variable rate demand notes
8: grant anticipation notes (GANs)
112
municipal bonds
securities issued by state or local govt; lending money for the purpose of public works
113
general obligation municipal bonds
bonds issued for capital improvements that benefit an entire community
114
general obligation bonds do not producce
revenue
115
revenue bonds
used to finance any municipal facility that generates sufficient income; utilities, housing, transportation, education, health, industrial, sport
116
authorities of revenue bonds
quasi- govt entities tasked with building roads, tunnels, bridges, and other infrastructure
117
the interest from bonds issued by or from U.S. territories are
tax free to U.S. taxpayers
118
short-term municipal obligations
anticipation notes- are short-term securities that generate funds for a municipality that expects other revenues soon
119
short-term municipal obligations are usually
less than 12 months maturity, although they may range from 3 months to 3 years
120
short-term municipal obligations are repaid when
the municipality receives the anticipated funds
121
tax anticipation notes
finance current operations in anticipation of future tax receipts; helps municipalities to even out cash flow between tax collection periods
122
revenue anticipation notes
offered periodically to finance current operations in anticipation of future revenues from revenue-producing projects or facilities
123
tax and revenue anticipation notes
combination of the characteristics of TANs and RANs
124
bond anticipation notes
sold as interim financing that will eventually be converted to long-term funding through a sale of bonds
125
construction loan notes
issued to provide interim financing for the construction of housing projects
126
variable-rate demand notes
have fluctuating interest rates and are usually issued with a put option; the investor could periodically return the security to the issuer for its stated price
127
grant anticipation notes
issued with the expectation of receiving grant money from the federal government
128
the tax savings of a tax-free bond may be more attractive than a taxable bond with a higher interest rate if
the investor is in a higher tax bracket
129
the higher the tax bracket
the greater the tax exemption's value
130
tax equivalent yield
determines a municipal bond investment's tax benefit; divide the tax-free yield by 100% less the investor's rate
131
when calculating tax equivalent yield, the municipal yield will
always be less than the corporate yield
132
tax equivalent yield calculation
municipal bond yield/ (100% - the investor's tax bracket)
133
tax-free equivalent yield
corporate yield x (100% - investor tax bracket %)
134
treasury bills
direct short-term debt obligations of the U.S. govt; mature in 4, 13, 26 or 52 weeks; maturity is subject to change but always a year or less
135
t - bills pay
no interest; rather issued at a discount from par value and mature at full par
136
t-bills and STRIPS are the only treasury security
issued at a discount
137
t-bills are the only treasury security issued
without a stated interest rate
138
t-bills are highly
liquid
139
13 week (90 day) t-bills are issued in market analysis as the stereotypical
risk-free investment
140
treasury notes
direct debt obligations of the U.S. government that pay semi-annual interest as a percentage of the stated par value, and they mature at par value; intermediate maturities (2-10 years)
141
treasury bonds
direct debt obligations of the U.S. government that pay semiannual interest as a percentage of the par and mature at par value; long-term maturities, greater than 10 years and up to 30
142
treasury receipts
brokerage firms can create a type of bond known as a treasury receipt from U.S. treasury notes and bonds; not backed by full faith and credit of the U.S. treasury; BD yield more profits by separating coupon interest payments from the principal creates new securities with several maturity dates
143
treasury STRIPS
treasury departments own version of receipts; designates certain issues as suitable for stripping into interest and principal components
144
both treasury receipts and treasury STRIPS are
zero-coupon bonds
145
treasury inflation protected securities (TIPS)
issued with maturities 5, 10, or 20 years; fixed coupon rate and pay interest every 6 months based on the inflation rate; interest payments will increase with inflation and decrease with deflation; final principal payment at maturity will have been adjusted for inflation over the term of the bond, the final principal payment will never be less than the original $1000 par
146
farm credit systems
privately owned; a national network of lending institutions that provides agricultural financing and credit; govt sponsored enterprises that raise loanable funds by selling farm credit debt securities to investors
147
the farm credit administration (FCA) is
a government agency that oversees the farm credit system
148
government national mortgage association
GNMA or Ginnie Mae; govt owned corporation that supports the Department of Housing and Urban Development; backed by full faith and credit of the government; many have a stated 30 year life, GNMAs are typically sold based on average life expectancy
149
prepayment risk
early payout; when a mortgage is paid off before its maturity date, the GNMA investor will receive back all outstanding principal of that loan at par
150
federal home loan mortgage corporation
FHLMC or freddie mac; a public corporation; created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial institutions and packaging them into mortgage-backed securities for sale to investors
151
federal national mortgage association
FNMA or fannie mae; publicly held corporation that provides mortgage capital; purchases conventional and insured mortgages from agencies such as federal housing administration and the veterans administration; backed by FNMAs general credit
152
federal home loan mortgage corporation (freddie mac) and federal national mortgage association (fannie mae) are sometimes called
government - sponsored entities
153
capital market
serves as a source of intermediate- term to long-term financing, usually in the form of equity or debt securities with maturities of more than 1 year
154
money market
provides short-term funds to corporations, banks, broker dealers, government municipalities and the U.S. federal government
155
money market instruments are
fixed- income (debt) securities with one year or less left to maturity; highly liquid; high degree of safety
156
because money market instruments are short-term they have
little time to default
157
investors who purchase money market securities generally do not receive
interest payments; instead they are issued at a discount and mature at face value
158
certificate of deposit
type of money market security; bank issued and guaranteed with fixed income rates and minimum face values of $100,000 (jumbo CDs); although face values of $1 million or more are common; most mature in one year or less
159
some certificate of deposits that can be traded in secondary markets are called
negotiable CDs
160
only _____ are considered to be money market instruments
negotiable CDs
161
a negotiable CD is
a bank's version of an unsecured promissory note; bank's promise to pay principal and interest is secured by no physical backing; secured by bank's good faith and credit; sold at face value and pay interest at maturity
162
retail CDs
difficult to transfer; (not liquid); often for specific amounts, and any minimum is set by the bank selling the CD
163
bankers acceptance (BA)
a short-term time draft with a specified payment date drawn on a bank; post-dated check or line of credit
164
the payment date of a BA (banker's acceptance) is usually
between 1 and 270 days ( 9 months)
165
corporations use BAs extensively to
finance international trade; BA typically pays for goods and services in a foreign country
166
Commercial paper
prime paper; promissory notes; corporate issued; short-term, unsecured commercial paper to raise cash to finance accounts receivable and seasonal inventory gluts
167
commerical paper maturities range from
1-270 days, although most mature within 90 days
168
typically companies with excellent credit ratings issue
commercial paper
169
U.S. treasury bills
direct short -term debt obligations of the U.S. govt; issued weekly with maturities of 4, 13, 26, and 52 weeks
170
though t-notes and t-bonds are issued with longer maturities than t-bills, once the notes and bonds have only 1 year left to maturity,
they are considered money market instruments
171
repurchase agreements
REPOs; a financial institution, such as a bank, raises cash by temporarily selling some of the assets it holds with an agreement to buy back the assets at a later date at a slightly higher price
172
a repo is an agreement to
conduct a transaction (sale) and the to reverse the transaction (repurchase) in the future
173
REPOS are often used by banks that
need to raise capital
174
reverse repurchase agreement
reverse repo; a dealer agrees to buy securities from an investor and sell them back later at a higher price
175
federal funds loans
any deposits in excess of the required amount of money it member banks must keep on reserve as mandated by the federal reserve board (FRB)
176
federal funds can be loaned from one member bank to another for the purpose of
meeting the reserve requirement
177
why would you place money market securities in a client's portfolio?
1: highly liquid
2: very safe
3: good place to invest money that will be needed soon (short-term)
178
money market securities rate of return is
quite low; not suitable for long-term investors
179
collateralized mortgage obligations (CMO)
a type of asset-backed security; issued by private-sector financing corporations; pool a large number of mortgages, usually on single-family residences
180
a pool of mortgages is structured into maturity classes called
tranches
181
CMOs are often backed by
Ginnie Mae, Fannie Mae, and Freddie Mac; are historically rated high
182
pooling the assets into financial instruments allowing them to be sold to general investors more easily than selling them individually is caleld
securitization
183
securitization allows the risk of investing to be
diversified because each security will now only represent a fraction of the total value of underlying assets
184
CMO pays principal and interest from the mortgage pool
monthly; however it repays principal to only 1 tranche at a time
185
CMO principal payments are made in ____ increments to ______.
$1000; randomly selected bonds within the tranche
186
collateralized debt obligations (CDO)
complex asset- backed securities; portfolios consist of non-mortgage loans or bonds; auto loans, leases, credit card debt, a company's receivables
187
collateralized debt obligations (CDOs) represent different types of
debts and credit risk
188
different types of debt and risk categories are often called
tranches or slices
189
the higher the risk associated with the tranche,
the more the CDO pays
