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