SIE Chapter 4
What is the regular way settlment for: Treasury Bills Treasury bonds and notes
1 business day
Treasury bonds are quoted as a percentage of par, in minimum increments of ___
1/32
_____Very short maturities of 14 -90 days (30 days are most common) Issued at discount, sold at par in book entry form Sold in units of $100k up to 1 M
Commercial paper
In regards to taxation, how are municipal gains taxed?
Federally exempt have to pay state and local tax
___ are explicitly backed by the government. They are "credit/default" risk but are subject to purchasing power risk and interest rate risk
GNMA (Ginnie Mae Bonds)
Treasury bills, Treasury notes, and treasury bonds are examples of __ debt
Government
Debentures are intermediate and ___ term (unsecured/secured) debt
Long term Unsecured debt
If an investor is looking for monthly income, what would you recommend?
Mortgage secuirties- like Freddie Mae, etc. Because they pay monthly.
Which has a higher return? Secured or non secured?
Non secured- it has more risk. no colleral- so it pays out more.
Stock has to be traded above ____ for the re to be an arbitrage opportunity
Parity
Ginnie Mae are direclty backed by the ____
government
If a bond has no coupon being paid, it has no ___ risk
reinvestment risk
What two ways can bonds be issued?
secured and nonsecured
Mortgage bonds are considered ____
senior debt
Whats a debenture?
unsecured bond
Commercial paper, debentures, subordinated debentures, and income bonds are all examples of what?
unsecured debt instruments
Benefits of convertible bond
can be changed into an annual return.
Whats the junior most secuirty
common stock
Pros for Bondholder of convertible bonds (2) Cons for bondholder (1)
Possible Capitl gains IF converted, dividend payments are taxed at a lower rate Cons- lower coupon than non-convertible bonds
Treasury Notes are ___ term
intermediate 2-10 years
$1000 par bond with a converstion ratio of 10:1 can beconverted into stock at $_____ per share
$100
MBS (Mortgage -Backed securites) require ___ minimum demoninations When are payments made? Tell me about the prepayment risk
$25k Monthly payments (principal and interest) Prepayment risk- occur when home is sold or refinancesd. Prepayment risks increases when intrest rates fall because people usually refinance
list the ranking of those that get paid first when a liquidation occurs
1- Secured 2- Debentures 3- Subordinated debentures 4- subordinated credit holders 5- Preferred stock holders 6- Common stockholders
Who gets paid first when a liquidation occurs?
1st- secured creditors/secured bondholders
What is the regular way settlment for: Corporate bonds Municipal securities Mortgage-backed securities
2 business days
Corportes oand munis use ___ days in the year for accrued interest
360
Some bonds take in consideration 365 days of the year for accrued interest while other bonds consider ___ days
360
T- Notes and T- Bonds usually use how many days of the year for accrued interest?
365
What does the Trust Indenture Act of 1939 state?
ALl corporate issues of more than 50Mplus need to have a trust.. (CORPORATE need the trust but the municipal and government do not)
____ When a trader buys the lower priced security and at the same time sells the higher priced security to lock in a profit
Arbitrage
why would an investor seeking income not want to do an income bond?
Because they are non guaranteed. In addition, if incomoe bond has missed a payment, it is not considered in default.
What does the Fed do to loosen credit? What is this process called (that spurs economic growth)
Buy treasuyr securities from primary delaers. The dealers then privde cash to other dealers (mostly banks) Market interest rates are lowered since the banks have more cash. this is considered a DOVISH to spur economic growth
What are secured bonds backed by?
Collateral (this is used to repay investors if the business falls)
___ are short term corporate bonds backed solely by the full faith and credit of the issuer
Commercial paper
____ is unsecured debt
Debenture
____ are unsecured- backed by the faith and credit of issuer
Debenture bonds
Debt gets paid before
Equity
Interest from US Treasury debt is subject to __ tax
Federal income tax
Two are implied guarantee from federal government and one is actually backed up by the fed government. Which is which? Freddie Mac, Fannie Mae, Ginnie Mae
Ginnie Mae is actually backed up The other two, Freddie Mac and Fannie mae are implied back up
what does GNMA stand for
Government National Mortgage Association
Trade for government securities takes ____days to settle? Trades in corporate take ___ days to settle?
Government securites - Tplus 1 (1 day) corporate settles T plus 2 (2 days)
Call features require the issuer to pay a _____ coupon rate
Higher
What bonds trade flat? (meaning they don't pay interest)
Income bonds and Zero coupons (no accrued interest- all you have to pay is the purchase price)
-____ defines the interest rate, maturity, collateral, call or put provision, and other features of a bond
Indenture
accrued intrest
Interest earned but not paid out.
Income bond/Adjustment bonds- what are they used for and when do they pay?
Issued when corporation enters bankruptcy- done to replace existing bonds. They don't pay interest unless and until corporation makes additional earnings!
What does "closed end" mean? (for collateral)
It means the colleraterol cannot be used to secure any other bond issues).
Are Seires EE savings bonds secuirites?
N0- they do not trade. They are NOT securities
Whats the seniormost equity secuirty
Preferred stock
When interest rates fall, the home owner is likely to refinance. This makes the issuer pay more ___ each month which creates ___ & ___ risk
Principal each month prepayment risk and reinvesment risk
____ is when Feds buy treasuries. Used to inject cash in money supply, loosening credit interest rates go down and help the economy.
Repurchase agreement
____ Is when Feds sell treasuries and take money out of the economy. Interest rates go up as there is less money available to be borrowed.
Reverse purchase agreement
____ are savings products issued by the government iwth a minimm purchase amount of $25. They do not trade but are redeemd by treasury
SEries EE bonds
___ is where the intrest and princiapl is separeated. Each interest payment and principal is sold separately at a discount to par. Longer maturity- higher discount Great for investors who wish to avoid reinvestment risk
STRIPS
When do cash settlements occur?
Same day as long as trade is done before 2:30 ET
_____ (also known as EE bonds) are nonnegotiable and cannot be ____. They are bought from the ___ and can only be redeemed with the ___
Savings bonds cannot be traded bought and redeemed with government
____ buy and sell treasuries in the market through th primary dealers and can bid at weekly auctions.
Secondary dealers (Small banks and brokerage firms are secondary dealers)
Treasury bills (Money market securites) are ___ Term
Short (4 week up to 52 week)
______ are for investors who wish to avoid reinvestment risk. They don't havei ntrest payments so they are zero-coupon
Strips (type of Treasury)
Interest recieved from US government is subjected to ___ tax but is excluded from __ and ___ income tax. This makes it a tractive to those in high tax states such as NY and Cali
Subject to Fed tax Exempt from state and local tax
This investment is nice because the bondholder will get a higher return at maturity if the principal amount is adjusted towards inflation... AND they are protected if the principal amount is decreased due to inflation. In this case they would still get par.
TIPS
___ are good for people who are worried about inflation risk. Fixed interest rate over the life of the secuirty. Principal is adjusted every 6 months
TIPS (Treasury inflation protection securities)
What does "Trade flat" mean and what k
Traid without any accrued interest unpaid interest accures and is only paid ifi corporation starts making profits. .
___ short term government debt. issued at a discount. $100 minimum and mature at par (no interest). Trades in 1 day. Wuoated on disount yield basis
Treasury Bills
____ are for short term securities ( 1,2,3,6, and 12 months) issued at $100 minimum. quoted on a discount yield basis
Treasury bills
What type of bond pays interest semiannually and are noncallable?
Treasury bonds
____ bonds maximum maturity of 30 years multiples of $100 par Trades next day Pay interest semi annually Accrued interest basd on actual basis quoted 32nds
Treasury bonds
_______ are long-term secruties issued ith maturietes of 30 years with minimum doenominations of $100
Treasury bonds
___ Government debt maturities range from 2-10 years. Issued in multiples of $100 parvalue. Trades in 1 day. Pays semi annually Accrued interest based on actual basis Quoted in 32nds
Treasury notes
____ have maturites of 2-10 years with minimum deonominations of $100 par value and pay semiannually. They are quoted as a percentage of par value 1/32
Treasury notes (T notes)
Another term for STRIPS is...
Treasury reciepts
who makes sure the corporation adheres to the indenture?
Trustee
T-bonds, STRIPS, TIPS, notes, bills and EE bonds are all types of _____ obligations
US government
The largest participatns in the market are the ___ Primary Dealers deal directly with the __
US government securites dealers Primary dealers deal with the FED
___ are bills issued at a discount to par
US treasury bills
____ are the most heavliy traded secruties
US treasury bonds
Guaranteed bonds
bond issued by subsidiary and guaranteed by parent money (rating is based on the parent company because they are guaranteeing the debt)
Most bonds issued today are ___ bonds
book-entry bonds
Interest accrued after settlement date belongs to___
buyer
______ can be converted into equity at a given ratio- includes parity, arbitrage, and conversion benefits
convertible bonds
As far as interest goes- Corporations get tax deductions on ____ but not on ____
deduction for interest payments on bonds dividend payments for stock are not tax deductible
What is parity mean?
equal value Parity= Conversion ration times the stocks market price
when are fed funds payable?
immediately at a Fed Reserve Branch
________ deines all iportant features of the bond (interest rates, maturity, and if the bond is callable.. etc)
indenture
STRIPS are zero-coupon (deep discount) obligations... making them suspeptable to what kind of risk?
interest rate risk
Common stock has a ____ claim to all debtl
junior
Subordinated debentures are ___ to regular debentures
junior
Treasury bonds are __ term
long term 20-50 years issued in book entry form
Conversions and warrants allow the investor to convert bonds to stock and allow the issuer to pay a ___ coupon rate
lower
Secured bonds are backed by what type of collateral?
mortgages, equipment, senior debt.. etc
Is savings bond a security?
no- cant be traded
Does Sally Mae deal in mortgage debt?
no.
Trading of governemnt and agency securites takes place soley in the ___ This includes what type of corporations?
over- the-counter market (NOT exchange) Commercial banks, forieng banks, US government securiteis dealers, full service brokeragke firms, federal reserve itsself
Treasury inflation protected securites (TIPS) is good for an investor wanted to avoid ____ risk
purchasing power risk (due to inflation) TIPS has a fixed interest rate over the life of the bond. They adjust the principal every six months.
Intrest accrued prior to settlement date belongs to ___
seller
What does the fed do to tighten credit? What is this process called (to slow economic growth)?
sells treasury securitesto primary dealers. It removes cash from banking systems and makes interest rates rise. Its considered a HAWKISH stance to slow economic growth
Does Sallie Mae pay monthly or semi annually? Is it backed up by mortgages?
semi annually not backed up by mortgages
Equipment trust certificates offer company equipment for collateral. They are usually given in ____ form and usually don't allow what kind of feature?
serial form usually don't allow collable features
Most agency securites are quoted by dealers on a ____ basis against eequivalent maturing treasuries
yield spread
