Types of Bonds
MBS are sometimes referred to as....
"pass through"
Moral Obligation Bonds
- RISKY municipal bond; that is not backed by full faith and credit - if cannot pay, state legislative appropriations would be required
banker's acceptance (BA)
A money market instrument used to finance international and domestic trade. 2. time draft drawn on a deposit at a bank
Special Tax Bonds
Bonds that are secured by local taxes. Typically in the form of sales taxes, cigarette taxes, and fuel taxes
___________support infrastructure projects that are "free" to the public
GO bonds
bonds used for non-revenue producing, long-term capital projects including roads, parks, and schools
General Obligation (GO) Bonds
What is the difference between MBS issued by Ginnie Mae, Fannie Mae, and Freddie Mac
Ginnie Mae securities are backed by the full faith and credit of the US government Fannie and Freddie are not GUARANTEED
municipals issue ________ to build commercial offices and lease the facility to a private corporation to encourage economic development
IDR bonds (Industrial Development Revenue)
how often do MBS pay interest?
MONTHLY
what type of security pays monthly interest to their investors?
Mortgage Backed Securities
Prepayment Risk is associated with what type of security? what other risk is this associated with?
With Mortgage Backed Securities, if interest rates DECREASE, homeowners will prepay their mortgages and refinance at a lower rate reinvestment risk now comes into play because holders have to reinvest their interest received at a lower rate
what type of asset is not going to be backed by an ABS?
a piece of actual equipment; hard assets
ad valorem tax
a tax levied on the assessed value of real and personal property (sales, and property tax)
Bond referendum
bonds subject to voter approval
certificate of deposit offered by a third-party non bank provider
brokerage CD
unsecured corporate debt is also called a....
debenture bond
what is the tax exemption for US treasury securities
exempt from state and local level, but taxable at federal level
true or false: convertible bonds have higher interest rates than non-convertible bonds
false, because an investor has the advantage of converting, they do not receive as much interest convertible bond = advantage to investor = lower rate
true or false: interest paid on US treasury is taxable at federal, state, and local level
false, it is taxable at the federal level but exempt from the state and local level
true or false: municipal securities are most appealing to those in the lowest tax bracket
false, the higher the tax bracket the more money they save from tax-free interest
true or false: revenue bonds are a form of corporate debt
false, they are municipality bonds they are issued by municipalities (transportation systems, power systems) but are not backed by tax revenue
true or false: the secondary market for municipal bonds is highly liquid
false, they are not because each state bond is unique with its own structure and conditions the chances of a specific local bond being available in the market is very small
true or false: brokered CDs offer lower yields than traditional negotiable CDS
false, they offer higher yields because they're riskier because they might not be backed by the FDIC
true or false: most types of fixed income securities trade on exchanges
false, they trade over-the-counter (OTC) between banks, broker-dealers that buy and sell securities over the computer equity markets is primarily conducted on exchanges
what is the main advantage of investing in municipal bonds? what is the trade-off?
generally exempt from some taxes tradeoff: exemption means investors will accept lower interest rate
bonds issued for the benefit of private corporations
industrial development revenue bonds (IDR)
requires a deposit of 100,000 or more and are often non-negotiable
jumbo CDs
what is the obligation of a trustee with regards to a trust indenture?
legally empowered to act in the best interest of the bondholders
Agency Securities
long-term bonds are issued by GSEs such as Ginnie Mae, Fannie Mae, and Freddie Mac. These are not issued by the US govenrment and not guaranteed with the exception of Ginnie Mae. Ginnie Mae has explicit backing of US government. Ginny has my back
parity price of the bond
market value of stock x conversion ratio based on
treasury notes (maturity, interest)
maturity: 2-10 years interest: pay semi-annual payments
treasury bonds (maturity, interest)
maturity: longest (30 years) interest: every 6 months
treasury bills (maturity, interest)
maturity: one year or less interest: like zero-coupons, sold at discount and mature at par
______instruments are considered near cash assets
money market
generally considered the safest possible investment: they offer maximum liquidity with little risk
money market instruments
very liquid and safe debt securities with maturities one-year or less
money market securities
CMOs
mortgage backed securities that are divided into distinct pieces called "tranches" where each tranch has a unique characteristic (maturity,
finance projects for the public good
municipal securities
money market instrument that is transferable to other investors
negotiable CDs
what is different from US non-marketable debt securities and marketable us securities?
non-marketable securities cannot be resold my investors so they have no secondary market
conversion ratio
number of shares a bondholder receives when converting...based on par value
Special Assessment Bonds
only assess property owners who benefit from the bond issue ex. properties within a specific area may benefit from an improvement to water lines and streets so these bonds only apply to those people that directly benefit
formula for conversion ratio ex. conversion price = $25
par value/ conversion price 1000/25 = 40:1
the market value at which an investor is indifferent between owning a convertible bond or converting into underlying stock
parity price
Treasury Inflation-Protected Securities (TIPS)
principal is adjusted semi-annual based on the CPI coupon rate stays the same, but coupon changes based on a changing principal
how are treasury bills quoted?
quoted on an annualized discount percentage basis
what is the difference between treasury bills/receipts and treasury notes/bonds
receipts and bills are zero-coupon bonds notes and bonds have a fixed coupon
when one parties agrees to sell securities to another at a specified price with a commitment to buy them back at a later date
repurchase agreement
municipal bonds issued and backed by a revenue producing facility (airport, water treatment facility)
revenue bond
what are the to main differences between GO bonds and revenue bonds?
revenue bonds are repaid by the revenue generated by the project and used for "fee for use" projects GO bonds depend on issuing additional taxes to pay the principal and interest payments and used for "free projects" like schools
___________support "fee for use" projects
revenue-bonds
formula for taxable equivalent yield ex. municipal bond is 4%, federal tax = 25%
tax-free municipal bond yield/ 1 - tax rate ex. 4%/ 75% = 5.33% a taxable bond yielding 5.33% is equal to a tax-free bond of 4%
how are t-notes and t-bonds quoted? what does 95-07 mean?
they are quoted as a % of par in 32nds so this means 95 + 7/32 x 10 = 952.19
zero-coupon bonds structured by broker-dealers and backed by cash flows from treasury securities
treasury receipts
true or false: GO bonds are guaranteed by revenues through the municpality's taxing authority
true
true or false: US treasury securities are exempt from state and local tax
true
true or false: all zero-coupon bonds have no reinvestment risk
true!
true or false: revenue bonds are generally issued with a bond indenture
true, because they are backed by the municipality and not taxes they must have covenants
true or false: treasury bonds would be more affected by a change in interest rates than t-notes or t-bills
true, because they have longer maturity they are more volatile
true or false: IDR bonds are taxable
true, cause the immediate benefit belongs to the private company, they are taxabale municipals issue IDRs to build commercial offices and lease the facilitity to a private corporation to encourage economic development
true or false: interest paid on corporate bonds is fully taxable as ordinary income at the federal, state, and local levels
true, certain exemptions apply to municipal and federal bonds but corporate bonds are fully taxable
true or false: asset-backed securities permit the securitization of financial assets and not hard corporate assets
true, they can be a pool of student loans or auto loans but they cannot be a piece of equipment like a truck, ship or airplane
true or false: STRIPS have no reinvestment risk
true, they do not pay a coupon so there is no interest to reinvest
true or false: MBS are an excellent source of current income
true, they pay a slightly higher interest rate than treasuries and pay a monthly rate
when does the federal tax exemption apply?
when interest is paid on public purpose municipal bonds that benefit the municipality at larger interest received from public purpose bonds is free from income tax
5 types of marketable US Securities and 1 type that does not trade on the secondary market
1. bills 2. notes 3. bonds 4. TIPS 5. STRIPS 6. US Saving Bonds do not
3 things to remember about the Trust Indenture Act of 1939
1. corporate debt issues of more than 50 million to include written agreement between issuer and independent trustee on behalf of bondholder 2. requires that trustee, usually a large bank, acts in best interest of bondholder 3. in default scenario, trustee can seize assets and resell them to recoup bondholders investments
2 things to remember about CDs...why is it different than a brokered CD?
1. fixed maturity 2. backed by FDIC brokered CDs are riskier because they are not backed by the FDIC
1. extension risk is relevant in what type of environment? 2. What are the consequences of extension risk? (2)
1. if rates are rising, homeowners will have no reason to prepay mortgages so maturity will be extended 2. rising rates = lower bond prices investor is stuck in investment for longer. tied up cash
three types of secured corporate debt backed by collateral
1. mortgage bonds- secured by real estate 2. collateral trust bonds- secured by a financial asset (stocks, bonds) held by the corporation 3. equipment trust obligations- secured by equipment or physical assets
three types of short-term municipal securities
1. tax anticipation notes 2. bond anticipation notes 3. revenue anticipation notes
four things to remember about general obligation bonds
1. they are municipal bonds that are backed by the "full faith and credit" of the issuer 2. interest is guaranteed by issuers taxing authority. Issuer is obligated to pay interest. 3. used for non-revenue producing projects like roads, parks, government buildings and school buildings 4. taxing authority is limited by a debt limit of amount of principal that can be outstanding at one time
What are treasury receipts?
1. zero-coupon 2. structured by broker dealers 3. backed by cash flow of a treasury security like a STRIPS
Double-Barreled Bonds
SAFE; GO bond that is backed by full faith and credit of municipality and a defined source of revenue
high-quality zero coupon bonds
STRIPS
two types of marketable US Securities that are zero-coupon bonds
T-Bills and STRIPS/treasury receipts
quoted on an annualized discount percentage basis
Treasury bills
why do fixed-income securities trade OTC?
because bonds trade far less frequently than the same issuer's common stock there will be fewer investors interested in any one bond at a specific time because of the different characteristics (maturity and interest rates)
why is the bid the higher offer for treasury bills?
because the buyer wants a big discount off par whereas the seller is willing to give a smaller discount.
a school district may require that a ____________pass with a two-third majority before the school can proceed with building a new gym
bond referendum
__________ is the term often used for corporate instruments with a maturity of no more than 270 days
commercial paper
a negotiable, unsecured debt instrument issued by a corporation to finance short-term operate expenses and working capital needs
commercial paper (promissory notes)
_________is the term that usually applies to longer-term debt instruments with maturities of at least 10 years
corporate bonds