Chapter 6 questions.docx - Chapter 6 1 What are capital...

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Chapter 6: 1. What are capital markets and how do bond markets fit into the definition of capital markets? a. Markets that trade equity (stocks) and debt (notes, bonds, and mortgages) instruments with maturities of more than one year. Bonds are long term debt obligations issued by corporations and government units. Bond markets are markets in which bonds are issued and traded. They are used to assist in the transfer of funds from individuals, corporations, and government units with excess funds to corporations and government units in need of long term debt funding. 2. What are the differences between T-Bills, T-notes and T Bonds? a. T-bills, notes, and bonds are marketable securities issued by the US government to raise funds to pay off debts. The basis of difference between three of them is the interest they pay and the years of maturity each holds b. 3. What is a STRIP? Who would invest in a STRIP? a. A treasury security in which periodic coupon interest payments can be separated from each other and the final principal payment. STRIPs are attractive investments to investors who want to receive a certain amount at a specified time in the future and not concerned about receiving current income 4. What are the advantages and disadvantages in investing in TIPS bonds? a. Treasury inflation protection securities are the bonds issued by U.S. Treasury. The returns of such securities are linked with inflation. The advantage is that the principal value of TIPS would increase in case of inflation in every 6 months or may decrease in case of inflation. Disadvantages are that the principal adjustments are taxable as the interests. 5. Describe the process at which t-notes and bonds are issued in primary markets a. The Tnotes and tbonds are issued in the primary markets through competitive and non-competitive treasury auctions. Treasury makes an advertisement, the bids are submitted by government securities deals corporate and individuals through the treasury website. 6. What is the difference between general obligation bonds and revenue bonds? a. GO bonds are fully secured by taxes b. Revenue bonds depend on the profit oriented projects as they secured by profit they will earn from that project c. GO bonds are issued for projects like schools, parks, and other general purposes d. Revenue bonds are issued to raise funds for toll roads e. Revenue bonds are less safe than GO bonds as they depend on the possibility of profit only f. Both muni bonds are exempted from taxes only if they are used for general usage. 7. Why would a municipal bond issuer want to purchase third party insurance on the bond payments?
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a. Some issuer of municipal bonds may not have good credit rating. Hence, they are insured by a third party who has a higher credit rating than issuer. This
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  • Fall '17
  • Foreign exchange market, Bond Markets

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