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153 Cards in this Set
- Front
- Back
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What is funded debt
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corporate bonds with maturities of 5 or more years
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What does 5M ABC J&J 15 8s of 14
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5 $1K bonds issued by ABC, paying on Jan and July 15 a stated interest of 8% and maturing in 2014
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What are the different types of maturity for a bond
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term--all at one
serial - scheduled portions mature balloon - bulk at end series issue - not issued all at once |
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Are bearer bonds or registered principal only bonds currently being issued
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No
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What are book entry bonds and what is an example
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bond owner does not receive a certificate us gov bonds are book entry bonds
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Registered bonds come in what denominations
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$1K and multiples of $1K
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What are the ratings that Moody applies to short term muni
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MIG 1-4 (best to adequate)
Note Moody swings up and down--i.e. uses upper and lower case letters as ratings |
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What attributes do bond raters consider to rate bonds
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corp date, stability, ability to meet payments, management
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Who has the first three places in terms of risk in a debt security
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First = us gov securities
Second = agency ginne mae, freddie mac, fannie mae, and federal farm credit banks Third - Munis |
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In serial bonds which get called first
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LT because they usually have highest interest rates
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What is prefunded or advanced funding
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new issue sold before original bonds are called. Often occurs when there is a call protection period AAA rated; Considered "defeased"; funds are escrowed in government securities
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What is crossover refunding
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revenue stream of advanced funding used for debt service
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What is a puttable bond
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Bonds issued with put options. For lower interest, investor can sell bond to issuer at full face value
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Explain the yield curve in terms ofY(yield to call); M (yield to maturity); C= current yield, and A=annual coupon rate
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YMCA
If bond sold at a premium, YTC rate is lowest If bond sold at discount yield to call is highest |
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When is the yield curve flat
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peaking economy
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When is the yield curve inverted
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FRB is tightening credit in overheated economy--rates are expected to fall in future
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What does it indicate if yield between gov and corp is widening
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recession--people are moving to more secure investment, i.e., gov
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What does it indicate if yield between gov and corp is narrowing
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expansion--investors decide to take more risks
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If you have two discount bonds, which one will appreciate the most if interest rates fall
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the one with the deeper discount (i.e., lower coupon)
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If you have two callable bonds, which one will appreciate the most if interest rates fall
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the one with the longest call date
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Which agency is the only agency whose securities are direct obligations of us government
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GNMA
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what act requires corporate bond issues over $5 million to be issued under a trust indenture
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trust indenture act of 1939. act does not apply to gov
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what is role of trustee in a corp bond issue
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usually is a bank or trust company. monitors compliance on behalf on bondholders
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disadvantages of convertible bonds for corporation
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dilutes equity, may shift control of company,
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what happens to convertible bonds when interest rates are stable
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The volatility will come from the can be volatility of the underlying stock
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what happens to convertible bonds in a declining market
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convertible bond market price levels off when its yield becomes competitive with yield of nonconvertible bonds, and it may not decline as much as stock
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what are reverse convertible bonds
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issuer gets put options that allow issuer to convert bonds into equity at a predetermined date. yields are higher on these bonds
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in bankruptcy what is the priority order btwn general creditors, secured debt and subordinated debentures
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secured debt, general creditors, subordinated debentures
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are t bills zero coupon
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yes. and short term. Treasury strips and Treasury receipt are both types of zero coupon bonds . Treasury receipts are issued by broker dealers
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why do t bills quote have higher bid than ask
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because tbills quoted in yield. bid price reflects yield buyers want to receive. higher yield translates to lower price
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what is maturity for t notes
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intermediate to10 years
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in what fraction are tnotes priced
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% of par in 1/32. ex 98.24= 98 24/32 = 987.5 for 1k note
tbonds are quoted same way |
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what are TIPS
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united snakes treasury inflation protection securities. notes with fixed interest rate and principal is adj semiannually by amount equal to change in cpi
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what gov agency is privately owned but government sponsored
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Fannie mae
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how do agency yields compare to gov and to corporate
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agency issues are higher than gov but lower than corp
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what is the only agency backed by full faith and credit of gov
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gnma and guarantees only mortgage backed securities.
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what are risks associated with mortgage backed securities
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prepayment and extended maturity risk
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FNMA, FNMA and Freddie Mac sell pass thru securities. what are these pass thru securities ?
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pools a group of mortgages in a pool. passes homebuyers interest and principal payments to investors either as mortgage participation certificates ( 1 payment per month) or GMC guaranteed mortgage certificate (2 payments per year)
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who owns fnma
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publicly held and traded nyse . securities backed by FNMA credit
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what are features of gnma securities
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monthly interest and principal payments
pass thru certificate significant reinvestment risk $2k minimum traded otc but issued by private lending institutions must pay state and fed tax backed by us government and residential mortgages |
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how are Sallie Mae issued
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discount notes and short term floating rate notes. floaters have 6- month maturities. used 4 student loans and usually exempt from STATE taxes
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what is competitive bid on gov securities
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placed by primary dealers as designated by federal reserve
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what is noncompetitive bid on gov securities
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bids placed by other participants such as broker/dealer individuals insurance companies price is lowest accepted competitive price or "stop out price"
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how are days calculated for determining interest accrual 4 us gov bonds and what is settlement day
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actual calendar days; settlement day=next business day after trade date. also T+1 settlement rule
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what is the "regular" way settlement and how do u calculate number of days for accruing interest for corp or municipal bonds
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360 days 30 days per month); settlement=3rd business day from trade date. do not count settlement day
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what is trading flat
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bond trading w/o accrued interest such as zeros or income bonds. The bond maybe an income bond , which normally pays no interest. If an income bond declares an interest payment, there will be an ex date and a record date. The bond may have defaulted on interest payments, in which case it is also trading flat
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what are cmo
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collaterized mortgage obligations. issued in tranches. often backed by gov agency pass thru. The returns are affected by interest rate changes. When interest rates decline, certain tranches are subject to prepayment risk.
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what are different types of cmo
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vanilla= pays interest on all tranches simultaneously
principal only ( sells at discount) interest only " PAC, planned amortization class=targeted maturity dates (protects from prepayment and extension risk) TAC, targeted amortization class=xfers prepayment risk to a tranche. no protection from extension risk |
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what are riskest cmo tranches
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zero tranche cmo or z tranche. ( last)
inverse floater cmo=highly leveraged and thinly traded. Note inverse floater has inverse relationship with short-term interest rate. Interest fall, both price and yield increases. However if rates increase, the price and yield of the floater can drop so significantly that holders end up with a security that pays little interest and has no liquidity |
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what are xteristics of cmo
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rate of principal payment varies. prepayment and and extended maturity risks ( unless PAC or TAC CMOs) if interest rate rises. secondary market. requires suitability statement. Not backed by gov but most are backed by gov agency pass thru securities held in a trust account
No fixed maturity date because mortgages are often paid off ahead of scheduled maturity |
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what are CDOs, collateralized debt obligations
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CDOs our security products we're pulling in repackaging of individual bonds has occurred. In most cases the assets in the CD to portfolio are small and individually not very liquid. Repackaging the assets facilitates them being sold to individual investors and secondary markets. A customer would have to choose a tranche that has the right risk characteristics for him in terms of suitability. Complex asset back security.
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What is commercial paper
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Commercial paper represents unsecured debt obligations of corporations needing short-term financing. Because commercial paper is with maturities of less than 270 days, it is exempt from SEC registration
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What is direct paper
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Commercial paper sold by finance company
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What are non negotiable CD
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Not traded in the secondary market and are not money market security
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What is the federal funds rate
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The rate the commercial money center banks charge each other ( overnight rate in amounts of $1 million or more). It is computed daily and is lower then the discount rate
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What is the discount rate
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The rate the Federal Reserve charges for short term loans to member banks. It is the only rate set by the Federal Reserve
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What are euro dollar
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US dollars deposited and banks outside the United snakes and its principal and interest are paid in US dollars. note Eurodollar bonds have no exchange rate risks for us investors. However non US investors are subject to currency risk
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What is a Eurobond
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Any long term debt issued and sold outside the country of the currency in which it is denominated
Issued in bearer form and pays interest once a year. Not subject to withholding taxes. |
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What is the interbank market
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It is unregulated decentralized International currency market
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Who is TRACE
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TRACE , trade reporting and compliance engine, is the FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market. It is not an execution system. Both sides of TRACE eligible transactions are required to report a trade when it occurs
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What is an equity linked note ELN
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A debt instruments where the final payment at maturity is based on the return of one stock a basket of stocks or on equity index. If an index, called on ILN, index exchange traded note, called a ETN
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What is the most volatile short term interest rate
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Federal funds rate
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Who can issue US dollar denominated eurobonds
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They can be issued by merely any issuer foreign corporations, foreign governments, us municipalities and US corporations. They cannot be issued by United snakes government
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What happens to inverse floater CMO when interest rates rise
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Principal payments to the investor may decrease and the reduction in principal payments expand the maturity date
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What it is step up step down CD
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CD that have interest rates that are fixed for a period of time and then have a higher or lower rate in later years
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What benefits do plan amortization(PAC) CMO provide compared to vanilla cmo
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PAC reduces prepayment risks for tranche holders. Other tranch holders were designed 2 absorb the bulk of prepayment risk
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What is the name of the association that uses historical data and projections of mortgage prepayments to estimate yield and maturity of different CMO trenches
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Public Securities Association PSA
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What happened to the conversion ratio on convertible stocks bonds when the conversion price decreases
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When the conversion price decreases, the conversion ratio increases
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What type of bonds have decreasing interest cost to the issuer
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serial bonds. Periodically serial bonds pay off part of the principal through serial maturities. This eliminates the interest cost: on the matured bonds
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How are non interest bearing securities like zeroes quoted
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By yield to maturity
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What risk are all CMOs subject to
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Interest rate risk. If rates rise extended maturity risk exist. If rates fall prepayment risk exist
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What is the major risk for Lt high quality bonds
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inflation ( purchasing power)
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What organizations are part of the federal Farm credit system
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Federal land banks, federal Bank of cooperatives, FICB ( federal intermediate credit bank)
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On a new bond issue, interest begins to accrue on what date
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The dated date and it excludes the settlement date
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How are us treasuries sold
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Auction
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What happens to yield spreads (safe vs risky) when investor confidence increases
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Yield spreads between the safest bonds and speculative bonds narrows because investors are willing to take greater risk
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When do trades on the interbank spot market settle
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One or two business days
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Do income bonds normally pay interest
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No and they usually trade flat. when they declare interest, they will have an ex date and record date.
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What is a defeased issue
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When an issue is pre refunded(advanced refunded), with all of the funds needed to call it in, the issue is known to be defeased. Because all of the capital needed to call in the existing Bond has been escrowed and is available, the issue can now be removed from the issuer's statement
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How is the computation of interest on municipal bonds different
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Interest accrues on the municipal bonds on a 360 day year basis, with a month having 30 days.
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What are the yield quotes on CMOS based on
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The tranches expected life. Not the average life of the mortgages in the pool backing all of the tranches
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A us corporation wishes to issue eurodollar bonds is not subject to what type of risk
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Because Eurodollar bonds are denominated in US dollars, a US corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the US, the issue is not registered with the SEC
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Who gets the accrued interest on a bond confirmation
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Accrued interest calculation is made to determine the seller's share of the upcoming interest payment. It is added to the buyer's contract price, the buyer pays , and it is added to the seller's contract price, the seller receives.
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What are negotiable CDs and what is the minimum denomination
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They issued primarily by banks and backed by the issuing bank. The minimum denomination is $100,000 to $1million. They are sometimes referred to as jumbo CDs and trade in the secondary market. Most jumbo cd mature in less than 1 year
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Who is the FiCB, federal intermediate credit bank
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Federal intermediate credit bank is one of the associations in the federal Farm Credit Bank system that issues NOTES and BONDS. Since the bonds are not backed by the government or by any specific assets, they are considered the debentures backed by only the faith and credit of the bank issuer
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What are the factors that increase a bond's response to an interest rate change
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Time to maturity, distance from par, and lower rating
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How is accrued interest calculated when a customer purchases a new municipal bond
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Interest accrues from the bonds dated date up to but not including the settlement date
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What is the effect on imports and exports when the us dollar has been falling against foreign currency
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Foreign money will buy more American currency. As a result US goods and services sold in foreign markets become less costly and exports should rise
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What is 1 basis point in relation to a bond
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In terms of bonds, a basis point is an increment yield equal to 10 cents per $1,000 face value. This equals .01% or 1/100%. A movement of one basis point is a movement of $0.10 per bond
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What is an equity linked exchange traded note, ETN
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They do not offer current interest payments or a fixed return at maturity as other debt instruments do. However they have a final payment based on the return of a single stock or a basket of stocks like an index . They are traded on an exchange. They are issued by financial institutions, and their prices can be impacted by changes in the credit rating of the issuer
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What mortgage backed security has the most predictable maturity date
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PACs, planned amortization class CMOs. They have to companion trenches - one to absorb prepayment and one to buffer against extension risk. Because there is less risk and a more certain maturity date, PACs tend to have lower yields than comparable TACs
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What are series HH bonds and how are the issued
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Series HH bonds can only be acquired by exchanging Series EE bonds. While this exchange privilege is no longer available, current holders of HH bonds are not affected. They were issued at face value and interest every 6 months.
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What is a repurchase agreement and what is a repo rate
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Repurchase agreements are typically initiated by commercial banks or the Federal Reserve Board. They enable banks to meet reserve requirement through the sale of securities, often overnight, with an agreement to buy them back at an agreed price, the repo rate
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What is the difference between an equity linked note, ELN, and an exchange traded note, ETN
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Equity linked notes are debt instruments where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index (ILN). Some, but not all, are exchange traded and those that are can be referred to as exchange traded notes
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How do you determine which bond issuers is most likely to refund
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coupon; low call prem ; earliest call date; longest maturity
An issuer is most likely to refund the issue that will cost the most money over the life of the issue. Always use the following orders in making this choice. 1)highest coupon, 2)lowest call premium, 3)earliest call date, and 4)longest maturity |
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What type of bond is the Corporation required to pay interest on its outstanding debt only when interest is declared by the Board of Directors
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an adjustment bond
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What are treasury strips
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SEPARATE trading of Interest and Principal Secutities. STRIP investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities. STRIPs can be purchased and held only through financial institutions and government securities broker dealers . The minimum face amount needed to strip a fix principal note is $100. They are zero coupon bonds issued by the US government and are subject to annual taxation on the year accreted amount
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In what maturities are usTreasury bills issued
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4, 13, and 26 week maturities
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What are spot prices
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Prices quoted for immediate payment and delivery of foreign currencies . Settlement for actively traded currencies will take place in 1 business day and for less actively traded currencies 2 business days
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What is a private label CMOs
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Private label CMOs are issued by home builders, and other private entities such as financial institutions and investment banks. They may or may not include government agencies securities in their portfolios and therefore carry an additional element of risk.
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What is the daily average rate charged by banks
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The federal funds rate. Each week, banks have to report their daily federal funds rate. The published rate is the average of all reporting banks over the course of the week
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Most interest on notes are paid semi-annually. Which well known pass-through certificate pays principal and interest monthly
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GNMA
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In a choice of convertible bonds, junk bonds, income bond and mortgage bonds an investor who wants a high level of income combined with a moderate level of risk would purchase and what adv does your choice have over the others
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Mortgage bonds. Because convertible bonds normally have a lower coupon rate than non convertible bonds and income bonds pay interest only if the company declares a payment, the best choice is the mortgage bond
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what is FLB Zr 12 87 87 1/2
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FLB is the issuer, zero coupon, 12=year of maturity, 87=bid, 87 1/2=asked ($875)
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In what denomination can you purchase CMOs
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CMOs can be purchased for as little as $1000 but mainly trade in minimum amount of $25,000.
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What are brokered CDs and how do they trade
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CDs sold by broker-- maturity of several years and sometimes higher yield, market driven prices. Rising interest rates along with limited liquidity may result in a significant loss of principal. Brokered CDs may be called before maturity
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When does settlement occur on Treasury bonds
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Next business day
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How is accrued interest on treasury bonds calculated
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Actual days in a year but not including settlement date
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A customer purchases a municipal bond on the secondary market and settles the trade and cash on August 1. If the next interest payment is September 1, what does the buyer pay
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On settlement day August 1, the buyer will pay the seller accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive 6 months interest from the issuer
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Noncompetitive bids for u s treasury securities are always
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Filled. Non competitive bids are made by entities other than primary dealers. The total dollar amount of these bids is set aside (to be filled) and the amount remaining is auction to primary dealers (competitive bids) with the highest bid (lowest yield) filled first
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What are Treasury receipt
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Treasury receipts are zero coupon bonds issued by broker dealers.
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How does the overnight repo interest rate compare to the bank rates and the federal funds rate
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The repo rate is lower than the bank rate and is closest to the federal funds rate which is also overnight
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What is a series I bond
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Series I bond have been designed for investors seeking to protect the purchasing power of their investment. The interest rate on these bonds has two components semicolon a fixed rate and an inflation rate tied to the CPI. But inflation component is recalculated every six months. The interest is added to the bonds face value each month and is paid when the bond is sold.
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How are us Treasury bills issued and traded
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Issued at a discount and traded flat, without accrued interest
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How are negotiable CDs traded
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With accrued interest
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What debt security does not have a fixed maturity date
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CMO, collateralized mortgage obligations. Because mortgages are often paid off a head of schedule maturity, the exact maturity date of a CMO is uncertain
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What can a US corporate manufacturer selling goods overseas and exposed to currency risk do besides trade listed currency options
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Trade the foreign currency in the interbank spot market. Spot trades that settle in one or two business days and forward delivery contract can be done there. Currencies do not trade on US exchanges
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How does a put feature of affect the yield of a bond
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Their yields are usually lower than those of non putable bonds. Exercise of the put feature is at the discretion of the bond holder. And it will most likely be used as interest rates are rising
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In terms of risk what is the difference between TAC and PAC CMOs
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PACs provide protection against full prepayment AND extension risk while TAC provide protection against prepayment risk only
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What is funded debt
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Corporate debt maturing in 10 years. Funded debt is simply another term for medium to long term corporate debt. If a corporate bond has 5 or more years to maturity, it is said to be funded debt of the issuer. Includes minicipal revenue bond
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What are Series EE savings bond
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They are issued by the US Treasury, are purchased at face amount and earn a fixed rate of return. They may be purchased in denominations as low as $25. They can no longer be exchanged for series HH bonds
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Which of Fannie Mae, Sallie Mae, Ginnie Mae and Freddie Mac is not a mortgage backed security
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Sallie Mae. Student loan Marketing Association.
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In what fractions are corporate bonds quoted
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Corporate bonds are quoted as a percentage of par in eighths. The quote 101 1\4 and is 1012. 50. This represents 101% of PAR plus $2.50. Each point in a corporate bond is equal to $10
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The process of pooling assets into a single financial instrument for the purpose of facilitating sales to the general investing public is called
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Securitization
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What is the only government agency security that is backed by the federal government
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GNMA. FNMA and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. All are subject to federal taxation and all are authorized by Congress
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What type of protection does a municipal bond put option provide to the holder
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It ensures the holder will never receive less than the par for the bond, it protects the holder from loss of principal when bond prices fall, it protects the holder from depreciation because of rising interest rates. Put options are exercisable only after the put protection has passed.
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What are PPNs, principal protected notes
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They are unsecured debt obligations back by the full faith and credit of their issuer. A principal protected note is a fixed income security that promises a minimum return equal to the investor's initial investment if held to maturity. It is considered to be a structured product and is comprised of a bond and an option component.
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It's a debt is subordinated, what should be some of the concerns of the holder
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A subordinated debt on has other debt holders ahead of it in the event of liquidation.
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What is pre funding
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Also called defeasement, pre funding involves issuing one bond to call an outstanding bonds at a future date. When this is done the money raised is held in escrow to redeem the outstanding balance at a future date. What was originally pledge to back to bond is now replaced by the escrowed fund. The issuer no longer has to show these bonds as an obligation on the deck statement
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All government securities are quoted in what fraction
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32nds. But like corporates, GNMAs accrue interest on a 360 basis whereas government uses actual days
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What is a non negotiable security
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securities that are sold at face value and the value doesn't change like a series EE bond, ownership cannot be xferred
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When interest rates are falling which bond's prices will appreciate the most
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Prices of long-term bonds are more volatile than prices of short term bonds. Therefore the bonds with the longest maturity will appreciate more when interest rates fall. Also prices of bonds with low coupon rate tend to be more volatile than prices of bonds with high coupon rate. A 20 year discount bond will appreciate more than a 20 year premium bond
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When do Treasury bills settle
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Settlement for weekly Treasury bills normally occurs On Thursday of the same week as the auction.
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If an investor is anticipating that yield spread between US government and BBB rated corporate bonds will widen, the investor is anticipating the US economy to
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Go into a recession over the coming months. Investors anticipate a recession, they tend to flee to quality. In this case they would sell lower quality corporate bonds and use the proceeds to buy higher quality government bonds. This forces the prices up and the yields down on quality bonds ,(government). If the yield on the junk(corporate bonds) goes up and yields on the government bonds decline the spread will widen |
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Who can issue a Eurobond
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Any issuer including foreign corporations, foreign governments, US munisipality, and US corporations with offices in foreign countries. They are not issued by the US government
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In terms of interest most money market security are traded
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Zeros and trade flat
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What does the investor receive at maturity of the bond
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At redemption the investor receives par plus the final semi annual interest payment
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What is a guaranteed corporate bonds
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A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation and is in a controlling relationship with it
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What interest rate is charged by banks competing for borrowers
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The prime rate and the broker call loan rate. Note that the federal funds rate is charged by banks to one another and the discount rate is set by the Federal Reserve Board
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For Bonds issued at a discount, the yield quoted are always quoted at
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Yield to maturity the lowest yield
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What types of municipal bonds are quoted on a yield basis
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secured bonds, tax anticipation notes, serial bonds
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What types of bonds are quoted as a percentage of par
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Term bonds or dollars, corporate bonds, and go municipal bonds
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What is an auction rate security, ARS
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ARS are long term variable rate municipal bonds with maturities of 20 to 30 years tied to short term interest rates. Interest rates are reset using a Dutch auction method at predetermined intervals, typically 7, 28, or 35 days. A failed auction can occur due to lack of demand and hence no bids are received to reset the the rate. This risk would not align with safety and liquidity investment objectives.
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What is a call protection features
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Call protection gives the bondholder a specified length of time during which the bond can not be called. It is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in previously issued at higher interest rates.
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What are sources of debt service for a go bond
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Personal property taxes real estate from delinquent property tax liquor license fees. All fees and taxes received by the municipality that are not the result of a revenue producing facility can be used to pay the debt service on a go bond
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What yield will be shown on an in whole call bond confirmation (bond call is certain)
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The yield to call
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What yield will be shown on an in part call bond confirmation (bond call is uncertain)
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If there is uncertainty as to whether the bond will be called, the lower of the YTC or YTM would be shown on the confirmation
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A municipal bond subject to refunding call must be quoted at yield to call under what circumstances
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If it represents the lowest yield such as a bond issued at a premium and callable at par. The investors yield would be less on a premium bond if called at par rather than is allowed to mature. Therefore it must be quoted at lowest potential yield.
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How do serial bonds provide decreasing interest cost to the issuer
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Periodically serial bonds pay off part of the principal through serial maturities. This eliminates the interest cost on the matured bonds
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What three things that are unique about Treasuries that you must remember
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Interest is the accrued based on actual days, settlement is one business day, traded in ,1/32 s
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What is the minimum denomination on a negotiable CD
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$100,000
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What kind of bond would most likely require a mandatory sinking funds
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A water and sewer revenue bond.
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What are special tax bonds
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Sometimes included in the larger category of revenue bonds. They never use ad valorem taxes.
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