Series 7: Debt Securities Flashcards

Terms Definitions
What is another name for advanced refunded bond?
US. Treasury Notes are _____ debt obligations of the Treasury. What three major characteristics do they have?
direct.1. Pay semi-annual interest as a percentage of stated par value.2. They have intermediate maturities (1 to 10 years).3. They mature at par value.
What are the only securities that can be used on advanced refunding?
US Treasury Issues.
What disadvantage to investors do convertible bonds have?
It pays a lower interest rate.
Which 3 securities are never sold with a call provision?
1. Equipment Trust Certificates.2. FNMA3. FHLBs
Treasury Bills pay no interest instead they do what?
Are sold at a discount and at maturity pay the par value.
Calls are usually done on what dates?
The two semi annual interest funding dates.
Treasury Bills are _____ ____ debt obligations of the US Govt.
short term
How do advanced refunded bonds work?
A method of refinancing. New bonds are issued which are used to buy treasury obligations, usually with higher interest rates than the original issue. These are placed with a trustee and are used to pay the original issue. The original issue is no longer secured by the revenue generation or taxes of the issuer.
Treasury Bills are offered in _____ _____ form only.
book entry
An investor in GNMA securities has as much safety as Treasury Bonds because they are backed by the _____ ____ ____ ____ of the US Government.
full faith and credit
"Double Barreled" bonds are backed by _______.
two or more sources of repayment.
What are Put Bonds and who issues them?
Bonds that give the buyer the right to require the issuer to repurchase the bond at par at a future date.
Municipal bonds are quoted as a percent (bond point) of par and fractions are basis points (.01 %). True/False
A convertible bond is a _____ debt instrument, usually a ______.
corporate; debenture
What is a Planned Amortization Class (PAC)?
A PAC is a type of Tranche that observes a sinking fund schedule as long as the prepayments of the underlying mortgages stay within a relatively broad schedule.
What are three advantages of convertible bonds to the issuer?
1. lower interest.2. Ready marketability.3. Forced Conversion.
Why is a Banker Acceptance used and how does it work?
It allows an importer to delay payment for goods for a short period of time (months) while they sell the goods to their domestic customers. The importer has his bank issue a letter of credit which is given to the Exporter. Once the exporter has shipped his product, he takes the letter to his bank which purchases it at a discount. The exporters bank in-turn sends the letter to the importer's bank sends the bankers acceptance to the importer's bank which will stamp it "accepted".
How does arbitrage work with a convertible bond.
If the market price of a stock is higher than the par value if the bonds are converted to that stock, an investor will purchase the bonds while executing a simultaneous order to sell the number of stock shares they will get when they convert.
To be considered a negotiable CD, they must have a value of at least ____.
The anti-dilutive provision in convertable bonds protect against price dillution due to what?
Stock splits and Stock Dividends.
How does a collateralize mortgage obligation (CMO) differs from pass-through securities?
A CMO is issued with different stated maturities, known as Tranches. As principal is paid, it is used to retire the newest maturity in sequence until each maturity has been paid off.
The sale of stock shares an investor does not own yet while engaging in arbitrage with convertible bonds is called what?
Short exempt sale.
How is Yield to Maturity (basis) computed by the "rule of thumb" method?
(annual coupon yeild+annual profit/yr)/average of par and current market
What issuer of bonds has the safest of all?
Fannie Mae (FNMA) was a govt owned corporation converted into a privately owned corporation in _____.
Long term debt is money borrowed for a minimum of ____ years.
They are issued at a _____ and mature no later than ____.
discount; 180 days.
Bearer Bonds are also called what?
Coupon Bonds.
A REMIC's regular interests, even when issued as common stock, are treated as ____ instruments for Federal Income Tax purposes.
What are two advantages to the owner of a convertible bond?
1. Upside Potential.2. Down-side protection.
If a bond has passed its call date with a call price of 104 and the price of similar issues is 130, what price will the bond be quoted at?
Whenever the word "government" is used on the exam, they are talking about what?
US Government
What is a term bond?
A bond that matures at the end of a set term (25 years for instance)
The indenture (also called the deed of trust) is what?
The agreement between the corporation and the investor.
AMBAC, FGIC, MBIA are acronyms for what type of firms?
municipal bond insurers.
With book entry bonds there are no definitive securities, no coupons. True/False
A Bankers Acceptance is sometime known as a ____ ___.
Time Draft
What is a bond registered as to principal only?
The issuer has a record of the owner but has coupons.
The Current Yield is what?
The annual return in dollars provided by the security divided by the current market price.
What are 3 disadvantages to the issuers?
1. Dillution of equity.2. Loss of leverage.3. Shift of ownership.
The principal only portions of US Treasury Strips are sold as ____ coupon bonds and are extremely _____.
zero; volatile.
The face amount (or par value) of each bond is always ____ unless otherwise specified.
A mortgage bond is always safer than any debenture. True/False
False. Some debentures are safer than some mortgage bonds.
What are the three different physical representations of bond ownership?
Bearer, Registered, Book Entry.
FNMA issues mortgage backed bonds to individual investors and these are ______ to the regular debentures in regards to principal and interest payments.
What two types of backing do government securities have?
Direct in the case of a Treasury issue and moral in the case of a Federal Agency issue.
Three things to remember about zero coupon bonds.
1. Always issued at discount.2. No reinvestment risk since there are no interest payments to reinvest.3. More volatile than bonds of similar quality.
The par value of a bond is the amount that the _____ ____ is based on and also the amount of _____ to be ____ at maturity.
interest paymentprincipal; repaid
Banker Acceptances are used to finance ____ businesses.
The effects of anti-dillution is to ___.
always reduce the conversion price.
What is serial maturities?
Used in Equipment Trust Certificates, a portion of the principal is repaid every year so that the outstanding debt is never greater than the value of the equipment that secures it.
Ad Valorem means what?
According to Value.
When Yield to Call is lower than Yeild to Maturity, what must be done?
The Yield to Call must be stated on the clients confirmation of order.
General Obligation (GO) Bonds are backed by what?
The full faith and credit of the issuer.
What are two methods of forced bond conversion?
1. If the stock has done very well, the bond is selling at a substantial premium, and the issuer exersizes their call at a price much lower than that premium, it is an obvious choice to convert. 2. The issuer can raise the dividend rate on the stock to where it pays more than the coupon rate of the bond.
What is the name of the government owned corporation formed when FNMA was split into 2 corporations in 1968?
Government National Mortgage Association (GNMA)
What are Revenue Anticipation Notes?
These are issued in anticipation of revenues, typically from Federal and State Governments to the Local Government.
PACs trade at a ____ to the plain vanilla CMO.
What are Tax Anticipation Notes?
Notes issued by cities in anticipation of tax collections.
Three advantages of Treasury Bills are?
1. absence of any risk.2. high liquidity.3. exempt from state income tax.
Limited and Special Tax Bonds are payable from what?
The proceeds of a specific tax.
Investors do not have to report interest earned on municipal bonds on their tax returns. True/False
False. While the interest is federal tax free they still have to report.
Revenue Bonds are payable from the earnings of what?
A specific revenue producing enterprise.
How does a repurchase (repo) agreement work?
A Govt bond dealer bids for a large number of treasuries. It only pays up-front for some of them, entering into an agreement to repurchase the balance in the future. In effect selling the balance back to the Treasury. As the dealer sells the Treasuries to customers, they will repurchase the securities from the Treasury to fill the orders.
The usual denomination of a municipal bond is ____ dollars.
Corporate bonds are quoted as a percent (bond point) of par. Fractions are in 1/8ths. Each bond point equals ____. Each 1/8th equals _____.
An Equipment Trust Certificate is like what form of consumer debt and is usually used to finance what?
Automobile loan.Rolling stock for railroads or other transportation companies.
What is Call Protection?
It is the number of years into an issue before the bonds can be called.
A Collateral Trust Certificate is secured by what?
Marketable Securities.
Commercial Paper has a maximum maturity of ____ days.
What is the difference between "Open End" and "Closed End" mortgage bonds?
On Open End bonds, the mortgaged assets can be used as collateral on subsequent bond issues. Closed End, the assets can only be used to secure a particular bond issue.
How is yield to call computed?
Same as Yield to maturity except it is computed to the call date and we use the call price instead of par.
US Treasury Bonds pay _______ interest as a percentage of the stated par value.
The Residual Interest in a REMIC are similar to _____ in a corporation and grant the holder what?
Common Stock;Any interst that is not a regular interest.
What is a book entry bond?
A bond with no certificates and ownership is kept in book entry only.
What is Sallie Mae?
Student Loan Marketing Association.
When we talk about Debt Captial, we are talking about what?
Long term debt.
FNMA securities are issued in ____ ____ form.
book entry
The capital market is the market for _____ ____ securities.
long term
US Treasury Bonds have ____ maturities, generally ___ to ___ years.
long term; 10; 30
The money market is the market for ______ ____ securities.
short term
Part of the monthly pass-through payment recieved by an investor consists of _____ and part _____.
principal; interest
Income Bonds pay interest under what circumstances, and these bonds are usually issued by who?
They only pay interest when earned to the extent it is earned. Bankrupt Companies.
When a bond is selling at a price above par, it is selling at a ______, below par at a _______.
premium; discount
A debenture bond is secured by?
It is unsecured.
The Yield to Maturity or True Yield is what?
The rate of return an investor earns from principal and interest assuming the bond is held to maturity.
What are Bond Anticipation Notes?
These are issued in anticipation of the flotation of bonds.
Of all the Money Market instruments, the least active on the secondary market is ______ _____.
Commercial Paper.
Moral Obligation Bonds have an ______ guarantee of payment.
What is a Real Estate Mortgage Investment Conduit (REMIC)?
An entity that holds a fixed pool of mortgages and issues classes of interest in itself rather than the mortgage pools.
The yield is generally ____ on revenue bonds than GO bonds.
Targeted Amortization Class (TAC) is what?
A class of Tranche that is based on prepayments of underlying mortgages following a specific rate.
What is a Prepayment Speed Assumption and what is its premise?
It is formula that assists an investor in assessing the likely prepayment rate on a CMO will be.The model assumes that newer mortgages are less likely to be repaid than older morgages.
Sallie Mae is owned by its stockholders and shares trade on the New York Stock Exchange. True/False
US Federal Agency Securities do not have direct Treasury backing, they are considered to be _____ ______ of the US Govt.
moral obligations
Freddie Mac Participation Certificates have a slightly higer interest rate than GNMAs because?
They are not backed by the full faith and credit of the US Govt.
Industrial Paper is Commercial Paper issued by _____.
non-financial firms.
The Interbank Market is what?
A decentralized and basically non-regulated market for sovereign countries and multi-national corporations to trade foreign currency.
Another factor of many but not all money market instruments is they are issued at ______, because they do not pay interest.
The Regular Interests in a REMIC are similar to ____ ___ in a corporation and grant the holder what?
Preferred StockUnconditionally entitle the holder to receive a specified principal repayment.
The premium on Municipal Bond Insurance is paid by _____ and insured bonds immediately qualify for ____.
issuerAAA and Aaa ratings by the raters.
Although _____ ______are the principal source of captial used by FNMA to purchase mortgages, FNMA can also from the _____ with most of the funds raised in two different ways.
private investors; treasury. 1. sale of unsecured bonds.2. sale of short term notes at discount.
In US Treasury Strips, what does the acronym STRIPS mean?
Separate trading of registered interest and principal of securities.
current yield is sometimes called what?
return on investment.
A TAC has cash flow that is more stable than ____ but not as stable as a ____.
The Nominal Yield or Coupon Rate is what?
The rate stated on the face of the bond.
How are bonds called?
Term bonds are called randomly by serial number. Serial bonds are called in inverse order. The numbers are published in the Wall Street Journal and it is the registed representatives responsibility to inform their clients when the bonds are called.
Freddie Mac issues a pass through security sometimes called a _____ _____.
participation certificate
Bonds with Balloon Maturities have what characteristic?
Part serial and part term with annual principal payments and a large baloon on maturity.
The current yield is computed how?
coupon rate divided by current market value.
What two factors determine interest rates?
1. supply and demand2. risk-reward
What is a bond sinking fund?
An escrow account established with regular earnings that is used to repurchase bonds periodically either on the open market or through a call provision.
What is different about US Treasury Strips as a security?
There are two items for sale separately. One is semi annual interest and the other is the principal at maturity.
What other bonds may use serial maturities?
Municipal Bonds that have the same issue date but different maturities.
Government and Agency bonds are quoted as a percent of par. Each point is $10. Each .1 equals _____ or $____.
1/32nd of a point. $.03125
Money Market instruments have a maturity date of _____.
one year or less.
What are the two principal federal agencies that issue debt securities?
The Federal Farm Credit Banks and the Federal Home Loan Banks.
When is a mandatory call usually used?
When there is a bond sinking fund.
A REMIC's income is not taxable but _____ is taxed.
the income of the holders of interst
FNMA also issues pass-through securities which are similar to _____ securities.
Freddie Mac
What is the Eurodollar?
The name given to US Dollar accounts in foreign banks.
What are two major reasons that bonds are not rated?
1. The issuer doesn't want to pay the cost of receiving the rating.1. The issuer does not have a sufficient credit history to enable the rater to make a fair judgement.
What is another name for Extraordinary Call and when is it used?
Catastrophe Call. When, due to damage or destruction, a revenue authority receives insurance proceeds they may use it to retire a revenue bond issue.
The cost of money is determined by what?
Supply and Demand.
Interest rates and bond prices run _____ to each other.
Mortgage Backed Securities are backed by _____ and usually have a ______ feature.
pools of mortgages; pass-through
What is a Bond Equivalent Yield?
It is a calculation that converts the yield on a discounted obligation so that it can be compared more readily with interest bearing obligations.
GNMA issues securities that are modified Pass-Through certificates. What are they secured by and how do they work.
They are secured by pools of FHA, VA, or FMHA guaranteed mortages. As the homeowners make their monthly mortgage payments, a pro-rata percentage is passed on monthly to the investor.
The two primary methods of issuing Commercial Paper are what?
1. Issue Sales to dealers. All industrial paper goes this way. 2. Issue Sales to public. Finance companies and banks use this method and it eliminates the dealer discount.
Refinancing a bond issue is called ______.
The Federal Home Loan Bank FHLB borrows money in the ____ ____ by issuing various debt securities, then re-lends it to _______, which in-turn lend it to ____ ____.
open market; savings & loan banks; home buyers.
AAA, AA, A, BBB, BB, B is representative of what rating firm?
Standard & Poor.
When a corporation wishes to buy back their bonds early at a discount (TVM) they make a tender offer. What is it?
The corporation publishes an announcement of their interest, the price they will pay, and how many of the bonds they are looking ot buy back.
Aaa, Aa, A, Baa, Ba, B are representative of what rating firm?
What are the 3 types of call?
1. Optional2. Mandatory3. Extraordinary
The interest on GNMA and FNMA bonds is subject to ____ and ____ taxation.
state; federal
Which category of ratings by both Moodys and Standard & Poorsa are considered "Investment Grade"?
The top four categories of each firm.
The minimum denomination of a GNMA bond is _____ and contrary to other federal agency issues is backed by what?
$25,000The full faith and credit of the Federal Govt.
The call premium is what?
The amount the call price is higher than par.
The nomininal rate on a zero coupon bond is ____.
High yield bonds carry ratings of ___ (S&P) or ___ (Moodys) and are also called ____ _____.
BB, Bajunk bonds
When is a call provision useful for an issuer?
If new bonds could be issued at a lower interest rate with the proceeds paying off the old issue, it makes sense for a corporation to do that. When their bonds are selling at a premium because of this lower rate environment a call provision allows them to repurchase the old issue at their lower call rate vs the higher current market (premium) price.
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