Debt
What exchange rate risk exists when making an investment?
- foreign security when the U.S. dollar strengthens
A customer purchases 5M of New York 8% ($80) G.O. bonds, maturing in 2032 at 90. The interest payment dates are Jan 1st and Jul 1st. The trade took place on Tuesday, February 1st. How much accrued interest will the customer be required to pay the seller?
-$36.67 -Interest accrues on municipal bonds on a 30 day month/ 360 day year basis, with interest accruing up to, but not including settlement date. The trade took place on Tuesday, Feb 1st. Settlement occurs 3 business days after trade date. Therefore, settlement takes place on Friday, Feb 4th. The last interest payment was made on January 1st, so the buyer owes the seller 30 days of interest for January and 3 days for February (up to, but not including the settlement date of February 4th). 33 days interest x $80 x 5 bonds 360 = $36.67 Note that "5M" stands for $5,000 face amount of bonds (M is Latin for $1,000).
A corporate bond was issued on Jan 1, 2010, that matures on Jan 1, 2030. The trust indenture allows the corporation to call the bond starting in 2020 at a price equaling 100 1/4 plus an additional 1/8 point premium for every 6 month period remaining until maturity. If the bond is called on Jan 1, 2025, the redemption price will be:
-101 1/2 (101.5) -If the bond is called on Jan 1, 2025, it has 5 years left to maturity. This is the same as 10 - six month periods. For each six month period prior to maturity that the bond is called, 1/8 point is added to the call premium (total equals 1 1/4 points). Since the call price is 100 1/4 plus the additional premium of 1 1/4 points, the total call price is 101 1/2.
What are special assessment?
-A municipal bond -Improvement that benefits only a small portion of the community.
What is a zero coupon bond?
-Bonds are issued with fixed par value (usually $1000) and a fixed maturity date -No interest payment are made on zero coupon bonds, instead, the bonds are bought at a discount to reflect a yield, which is calculated based on the discount at which the bonds are bought -To calculate the yield on a zero coupon bond, you need to use a bond calculator -The rate of return for zero coupon bonds is not subject to reinvestment risk -The interest income from such obligations is taxable annually -Pay interest at maturity -Are bought at a discount and mature at par
A facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated?
-Catastrophe call covenant ----Floods, mother nature stuff
Which of the following money market instruments is rated on a "P" scale?
-Commercial Paper ----is rated by Moody's on a P-1,2,3, and NP ("Not Prime") scale.
Credit analysis of an airport authority revenue bond would include evaluation of all of the following?
-Competing facilities -Flow of funds -Debt coverage ratios
If a bond is trading at a premium, price volatility is greatest for a bond having?
-Coupon rates slightly above the market interest rate -Long term maturities
All of the following statements are true regarding Eurodollar bonds EXCEPT?
-Eurodollar bond payments are subject to U.S. withholding taxes
Who can tax collateralized mortgage obligation (CMO) incomes?
-Federal -State -Local
Exchange Rate Risk deals with?**
-Foreign Currency denominated -Outside of the U.S.
What is a series bond?
-Has maturities and stated interest rates differ for the bonds in the issue.
What is true about comparing Companion (CMO) tranches to "plain vanilla" CMO tranches?
-Holders of Companion CMO tranches have higher prepayment risk -Holders of "plain vanilla" CMO tranches have lower prepayment risk
A municipal issuer would call an issue for all of the following reasons EXCEPT?
-Interest rates have risen sharply since the issuance of the bonds
What are speculative grades (ratings)
-Junk bonds -The order of the rating ---Ba ---B ---Caa ---Ca ---C
What makes an Auction Rate Security (ARS) fail?
-Lack of bids -Clearing rate above bid rate
Facts about U.S. Government (Gov) Debt
-Largest issuer of debt, over 16 trillion outstanding ---In the from of T-Bills, Notes, and Bonds -Not subject to the securities Act of 1933 -U.S. Gov. debt is issued as Book Entry form since 1983 -Sold via Auction Process ---Dealer bid on what yield they will pay in order to buy Gov debt -Consider the highest rated debt issued in the U.S. (risk free for principal- NOT risk free for purchasing power) -Saving Bonds (EE Bonds) are not considered part of this market and can only be redeemed with the Gov -Interest on direct U.S. Treasuries is subject to U.S. Federal taxation but EXEMPT from State
Treasury Note
-Paying interest semiannually -Maturity period of 1 to 10 years
An ETN does NOT have which risk?
-Reinvestment risk
A municipal bond which is secured by taxes OTHER than ad valorem taxes is a(n)?
-Special tax bond
What are the flow of funds?
-States the priority of collecting and disbursing pledged revenues. -The order ---Revenue Fund ---Operation and maintenance fund ---Sinking Fund ---Debt service reserve fund ---Reserve maintenance fund ---Renewal and replacement fund ---Surplus fund
What are Call features?
-The OPTION of the issuer to redeem the bond at a specific price. -Not an obligation ----Likely only if interest rates drop (down) ----Usually not to the benefit of the bondholder ----Like in preferred stock tends to put a ceiling price
FINRA rules do what for customers?
-The member must determine that its recommendation to purchase a structured product is suitable for that particular investor -The member must use its expertise to determine if the potential yield of the structured product is an appropriate rate of return in relation to the volatility of the reference asset -The member has an obligation to perform a reasonable basis suitability determination before recommending the product to any of its customers
What is a bond appraisal?**
-There is little or no active trading market for municipal bonds -To obtain an indication of the likely market price of the bond
Treasury Bills are not rated because?
-They have an implied AAA rating - the safest of instruments.
Government Sponsored Entities (GSE)
-Treasury Bills, Notes, and Bonds -Agencies: -- GNMA (Gov. National Mortgage Ass.) --FNMA (Federal National Mortgage Ass. ----Feddie Mac ----Fannie Mae -Sallie Mac (Student Loans)
Who issues Treasury Bills and at what price?
-U.S. Government -At discount and maturity par
What are call protection?
-U.S. Treasuries are not callable -A period of time that protects bondholder from a call -Trade on yield to maturity bases -Not going to be called -Highest rating -Risk Free
Debt Issuers
-U.S. Treasury (Government Debt) -Municipalities (State, County, and Local Governments) -Corporate (Domestic and International) -Foregin Government Debt (Bunds, Sterling, etc.)
All of the following would be purchasers of Eurodollar bonds EXCEPT?
-United States investors
Bonds trading at a premium, rank the yield measures from lowest to highest?
-Yield to Call -Yield to Maturity -Current -Nominal
A par quote goes by what other name?
-dollar quote
Why do Treasury bill yields drop at auction?
-interest rates are falling -Treasury bill prices are rising
Issuers are most likely to call their outstanding fixed income securities because?
-stock prices have reached a peak -during periods of high levels of deflation
How are government bonds, quoted, corporate bonds, quoted, and municipal bonds, quoted?
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How do they differ?
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How is corporate debt traded, over-the-counter, dealer paper, direct paper, NYSE, TRACE?
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What are Convertible Debt
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What are Diluted Earnings Per Share
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What are Dilution of earnings with the convertible bond issue?
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What are Parity on the convertible bond?
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What are Retirement of debt, sinking fund, tender offer, refunding, maturing,?
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What are Yellow sheets?
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What does trading flat mean?
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What is Anti-dilutive covenants?
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What is Direct paper?
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What is NYSE?
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What is OTC?
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What is Quote services, Bloomberg?
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What is Trace: Trade Reporting and Compliance Engine (2004)?
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What is a Dealer paper?
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What is a odd first payment on a new issue?
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What is a serial issue and how do interest rate movements effect the secondary prices of fixed income securities?
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What is commercial paper, and how is it priced?
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What is regular way and cash settlement
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When buying a bond. How do you calculate accrued interest payable to the Seller
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Who are the issuers of fixed income securities?
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What are Sinking funds?
Def:Rather than the issuer repaying the entire principal of a bond issue on the maturity date, another company buys back a portion of the issue annually and usually at a fixed par value or at the current market value of the bonds, whichever is less. Should interest rates decline following a bond issue, sinking-fund provisions allow a firm to lessen the interest rate risk of its bonds as it essentially replaces a portion of existing debt with lower-yielding bonds.
Who is not exempt from State and Local tax's? 1.Fannie Mae Pass Through Certificates 2.Treasury Notes 3.Federal Farm Credit Funding Corporation Bonds 4.Federal Home Loan Bank Bonds
Fannie Mae Pass Through Certificates
Municipal short-term notes are rated by?
Moody's on an MIG-1,2,3, and SG ("Speculative Grade") scale
