Debt
Treasury note
A negotiable, intermediate term U.S. Government security issued with two to ten years to maturity. Interest is paid semi-annually. The minimum denomination is $100.
A double barreled revenue bond is:
A revenue bond that is additionally backed by that municipality's ad valorem taxing power if there is a revenue shortfall. Thus, aside from the revenue pledge, these are additionally backed by a general obligation pledge of "full faith, credit and taxing power."
What is true regarding a municipal bond issue that is advance refunded?
- The security that backs the advance refunded bonds will change after the issue is refinanced - The marketability of the advance refunded bonds will increase after the issue is refinanced
A municipal bond dealer buys 100M of 30 year non-callable 9% General Obligation bonds at par less 1 1/2 points. After holding the bonds in inventory for a week, the dealer reoffers the bonds on a 9.10 basis. The dealer's approximate profit or loss on this transaction is:
"Par less 1.5pts" = 98.5 9% reoffered at 9.1% = discount on price Long term means you can approximate = 9/9.1= .989 .989-.985= .004 difference .004 x 100,000 = $400 gain
What is true regarding equipment trust certificates ("ETCs")?
- Equipment trust certificates are commonly issued by transportation companies - Equipment trust certificates are issued in serial maturities - Equipment trust certificates are secured by specified corporate assets
What is true during a normal yield curve?
- Long term bond prices are more volatile than short term bond prices - Yields on long term maturities are greater than yields on short term maturities As a general statement, yields increase as maturities lengthen because investors demand a premium for the extra risk associated with longer term maturities (both interest rate risk and purchasing power risk).
An issuer is most likely to call a bond with what level of interest rate and what level of premium?
An issuer is most likely to call bonds which have high interest rates (high financing cost to the issuer) and low call premiums (the least expensive for the issuer to call in these bonds).
All of the following are sources of income available for general obligation bond debt service EXCEPT: A: ad valorem taxes B: highway tolls C: license fees D: assessments
B: highway tolls General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Ad valorem taxes, fines collected for paying taxes late, assessments of additional taxes, as well as fees collected that are not a specified income source for revenue bonds, are all sources of income backing G.O. issues. Highway tolls are pledged to pay the debt service on revenue bonds that are sold to finance the construction of the road. These monies are not available to pay the debt service on G.O. bond issues.
An "in whole call" is a(n): A: mandatory call B: extraordinary mandatory call C: optional call D: extraordinary optional call
C: Optional call
Fitch's rates:
Corporate issues
In order to determine whether a Brokered CD being recommended to a customer will qualify for FDIC insurance, the registered representative must know all of the following EXCEPT: A: name of the bank issuing the CD B: ownership title of the CD C: face amount of the CD D: call dates of the CD
D
When a bond trades at a premium, which bond yield will be the lowest? A: Nominal B: Stated C: Current D: Basis (Yield to Maturity)
D When bonds are trading at a premium, the stated yield or nominal yield will be the highest, since it is the annual income divided by par value. Current yield is lower because it is annual income divided by the current market price (which is at a premium to par). Basis (or yield to maturity) is even lower because it not only considers that the current market price is at a premium to par; it also pro-rates the loss of the premium over the life of the bond, reducing the annual yield below the current yield.
$100 is the minimum denomination for all of the following EXCEPT: A: Treasury Bills B: Treasury Notes C: Treasury Bonds D: Treasury Stock
D: Treasury Stock The minimum denomination on a Treasury Bill, Treasury Note or Bond is $100 maturity amount. Treasury Stock has no standard par value, since it is common stock of an issuer.
Eurodollar deposits are in what currency? Where at?
Eurodollar deposits are U.S. currency held in banks in foreign countries, mainly in Europe. The Eurodollar market is centered in London - and the interest rate paid on these deposits is the London Interbank Offered Rate - "LIBOR."
An "unqualified" legal opinion is one which:
Gives an unconditional affirmation of the legality of the securities
Which of the following ratings applies to short term municipal issues? I MIG 1 II MIG 2 III P1 IV NP
I & II MIG ratings stand for "Moody's Investment Grade," with MIG 1 being highest and SG ("Speculative Grade") being the lowest ratings. These are the ratings used for short term municipal notes. The "P" (Prime) ratings are used to grade corporate commercial paper.
Homeowners will prepay mortgages: I when interest rates fall II when interest rates rise III so they can refinance at lower rates IV so they can refinance at higher rates
I & III Homeowners will prepay mortgages when interest rates fall, so they can refinance at more attractive lower current rates. They tend not to prepay mortgages when interest rates rise, since there is no benefit to a refinancing.
Which of the following statements are TRUE about Treasury Receipts? I The interest income on the Receipts is subject to Federal income tax each year II The interest income on the Receipts is exempt from Federal income tax III An investment in Treasury Receipts is free from reinvestment risk IV An investment in Treasury Receipts is subject to reinvestment risk
I & III Treasury Receipts are a zero-coupon obligations that must be accreted annually for tax purposes. The annual accretion amount is subject to Federal income tax each year, as the underlying securities are U.S. Governments. Each receipt is, essentially, a zero-coupon obligation, that is purchased at a discount, and which is redeemable at par at a pre-set date. Since semi-annual interest payments are not received, there is no reinvestment risk. The implicit rate of return is locked-in when the security is purchased.
When a recession is expected: I investors will sell corporate bonds II investors will sell government bonds III yields on corporate bonds would increase IV yields on government bonds would increase
I & III When a recession is expected, investors sell corporate bonds (increasing their yields) and buy government bonds (decreasing their yields). Thus, the spread between corporate and government bond yields will widen.
A rising rate of inflation would lead to: I lower bond prices II higher bond prices III lower bond yields IV higher bond yields
I & IV A rising rate of inflation will lead to higher interest rates. If interest rates rise, then bond prices will drop.
When the yield curve is ascending, which of the following statements are true? I Short term rates are lower than long term rates II Short term rates are higher than long term rates III To maximize income, an investor should invest in short term maturities IV To maximize income, an investor should invest in long term maturities
I & IV During periods when the yield curve is ascending (a normal curve), long term rates are higher than short term rates. In this case, one would buy higher yielding long term securities to maximize income.
Regarding Ginnie Mae Pass Through Certificates: I The certificates pay holders on a monthly basis II The certificates pay holders on a semi-annual basis III Each payment consists of interest only IV Each payment consists of a combination of interest and principal
I & IV Ginnie Mae Pass Through Certificates "pass through" monthly mortgage payments to the certificate holders. Each payment is a combination of both interest and principal paid from the underlying mortgage pool.
Which of following statements best describe the activities of municipal broker's brokers? I They perform trades on an agency basis only II They perform trades on a principal basis only III They carry inventory positions IV They do not carry inventory positions
I & IV Municipal broker's brokers perform specialized trades for institutions on an agency basis only - they do not carry inventory positions.
Which of the following statements best describe the activities of a municipal securities broker's broker? I Municipal broker's brokers assist institutions that wish to buy blocks of municipal bonds II Municipal broker's brokers assist institutions that wish to sell blocks of municipal bonds III Municipal broker's brokers act as agents for their clients IV Municipal broker's brokers trade for their own accounts
I,II,III Municipal broker's brokers act as agents for institutional clients, helping to buy or sell large blocks of municipal bonds. However, they do not trade for their own accounts, nor do they take inventory positions.
Which statements are TRUE regarding market index linked certificates of deposit? I Early redemption can result in the imposition of a penalty of 3-5% of the principal amount invested II The CD can only be redeemed on a specified date during each calendar quarter III The rate of return may be capped to a limit that is lower than the return of the reference stock index IV Market index linked CDs typically have a minimum life of 3 years
I,II,III,IV
Which of the following are money market instruments? I Tax Anticipation Notes II Certificates of Deposit III Treasury Bonds IV Commercial Paper
I,II,IV A money market instrument is issued with a maturity of 1 year or less. Tax Anticipation Notes, Certificates of Deposit, and Commercial Paper are all money market instruments. Treasury Bonds are issued in 10 to 30 year maturities
Which of the following projects would be financed by a revenue bond issue? I The construction of a new subway line II The construction of a new junior high schoo lIII The construction of a new hydroelectric generating plant IV The construction of a new sewage treatment plant
I,III,IV Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.
Which of the following trades settle in "Fed" funds? I General Obligation Bonds II U.S. Government Bonds III Agency Bonds
II & III Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.
Which of the following are risks that should be disclosed to customers when recommending the purchase of a CD sold through a brokerage firm? I There is a substantial penalty for early withdrawal of funds II If interest rates have risen after issuance and the CD is sold prior to maturity, the investor may experience a loss of principal III The secondary market is limited, so that sale prior to maturity can incur higher than normal transaction costs IV Brokered CDs do not qualify for FDIC insurance coverage if the issuing bank should fail
II & III There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity). Most of these instruments are held to maturity, so the secondary market is very limited. Finally, brokered CDs qualify for FDIC insurance as long as the CD is titled in the customer's name.
Homeowners will extend the anticipated repayment date of mortgages: I when interest rates fall II when interest rates rise III in order to refinance at higher rates IV in order to avoid refinancing at higher rates
II & IV If interest rates rise, then homeowners will defer moving at the anticipated rate, since they have a "good" deal with their existing mortgage. Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. This is extension risk - the risk that the CMO tranche will have a longer than expected life, during which a lower than market rate of return is earned.
Municipal secondary market joint accounts are formed to: I bid on new issues of bonds announced in the Daily Bond Buyer II acquire a large block of bonds offered in Bloomberg III buy new issues being sold by municipal issuers IV buy blocks of bonds being offered by participants in the trading market
II & IV Municipal secondary market joint accounts are formed to acquire, and then resell, large blocks of bonds in the secondary (trading) market. Dealer offerings of municipal bonds in the secondary market are found in Bloomberg. These accounts do not operate in the primary market (new issues from issuers). The municipal primary market publication is the Bond Buyer.
U.S. Corporations issuing Eurodollar bonds are: I subject to foreign currency exchange risk II not subject to foreign currency exchange risk III subject to filing with the SEC IV not subject to filing with the SEC
II & IV Since these bonds are denominated in U.S. Dollars and payable in dollars and not the currency of the country in which they are sold, Eurodollar bonds are not subject to foreign currency exchange risk. Thus, if the foreign currency appreciates, it has no effect on the issuer, who is obligated to pay in dollars (not the more expensive foreign currency). Also, since these bonds are issued outside the U.S., the issue does not have to be registered with the SEC.
Which of the following statements about Treasury STRIPS are TRUE? I Treasury STRIPS are suitable investments for individuals seeking current income II Treasury STRIPS are not suitable investments for individuals seeking current income III The holder is subject to reinvestment risk IV The holder is not subject to reinvestment risk
II & IV The best answer is D. Treasury STRIPS are government bonds that are "stripped" of coupons. They do not provide current income. The discount on the bonds must be accreted annually, with the annual accretion amount being taxable as interest income. As the bond is accreted, its cost basis is adjusted upwards so that at maturity, the bond has an adjusted cost basis of par. Therefore, no taxable capital gain is realized at maturity. This is a zero coupon obligation with a "locked in" rate of return over the life of the bond (thus, it is not subject to reinvestment risk).
The term "Funded Debt" applies to: I Short term debt II Long term debt III Money market debt instruments IV Capital market debt instruments
II & IV "Funded debt" is a term that applies to long term corporate obligations. This debt is "funded," indicating that the monies are a source of long term funding and do not have to be repaid shortly. Such long term debts are part of the capital market - the market for long term bonds and equity financings. Contrast this to a money market instrument, which is a debt with a maturity of 1 year or less. This is an "unfunded" debt that must be repaid shortly.
General obligation bond analysis would consider which of the following? I Protective covenants in the trust indenture II Trend of assessed valuation of the property III Ratio of overall debt per capita IV Record of tax collections
II,III,IV II Trend of assessed valuation of the property III Ratio of overall debt per capita IV Record of tax collections
Issuers of Federal tax exempt commercial paper include: I Corporations II Federal Government III Municipal Governments
III Only municipal issues are exempt from Federal income tax on interest income. Corporate and U.S. Government debt interest income is subject to Federal income tax.
Below is a listing of municipal bonds with the same credit ratings and maturities. Arrange the bonds in order of highest yield to lowest yield: I General Obligation Bond II Public Purpose Revenue Bond III Non-Essential Use Private Purpose Revenue Bond
III,II,I The "non-essential" use private purpose revenue bond would have the highest yield because the interest income is subject to the AMT - Alternative Minimum Tax. A public purpose revenue bond would have a lower yield because its interest income is not subject to the AMT. The G.O. bond would have the lowest yield because it is backed by ad valorem taxing power (considered the safest income source) and is not subject to the AMT.
Arrange the following CMO tranches from highest to lowest yield: I Plain vanilla II Targeted amortization class III Planned amortization class IV Companion
IV, I, II, III Companion tranches are the "shock absorber" tranches, that absorb prepayment risk out of a TAC (Targeted Amortization Class) tranche; or both prepayment risk and extension risk out of a PAC (Planned Amortization Class) tranche. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. A Plain Vanilla tranche is not relieved of either extension risk or prepayment risk, so it will offer a yield that is higher than a PAC or a TAC, but lower than the yield on a companion. A TAC is only relieved of prepayment risk, so its yield will be lower than a Plain Vanilla tranche. However, the TAC yield will be higher than the yield on a PAC, which is relieved of both extension and prepayment risk, while the TAC is only relieved of prepayment risk.
Best's rates:
Insurance companies, not securities.
A customer buys a $1,000 par 4 ½% Treasury Bond, maturing July 1, 2042, at 102-8 on Thursday, February 6th in a regular way trade. The bond pays interest on January 1st and July 1st. How many days of accrued interest are due?
Interest accrues up to but not including settlement. Settlement on U.S. Governments is next business day. Since the last interest payment date covered the period up to January 1st and the bond was purchased on Thursday, February 6th, the trade will settle the next day on Friday February 7th. The buyer must pay the seller: 37 days
A customer wants to know the principal difference between a market index linked CD and a regular CD. As the registered representative, you should inform the customer that:
Market index-linked CDs give a rate of return tied to the S&P 500 Index, whereas regular CDs give a rate of return tied to market interest rates Market Index Linked CDs are a type of "structured product" that consists of a "zero-coupon" synthetic bond component that grows based on the returns of an equity index; and that has a maturity established by an embedded option, typically 3 years from issuance. Market Index Linked Certificates of Deposit tie their investment return to an equity index, usually the Standard and Poor's 500 Index. This can give a potentially better rate of return than that of a traditional CD. If held to maturity, there is no penalty imposed on any CD. For an early withdrawal, traditional CDs may reduce the interest earned, but there is no loss of principal. In contrast, market index linked CDs typically impose a 3-5% principal penalty for early withdrawal. This "early withdrawal" penalty is imposed because the embedded option that established the maturity of the instrument was paid for and now is not being used. Both regular and market index linked CDs qualify for FDIC insurance. Finally, the minimum life for market index linked CDs is typically 3 years; whereas traditional bank CDs can have lives as short as 3 months.
Moody's and Standard and Poor's are, by far, the largest of the ratings firms. Both rate:
Municipal revenue bonds. Standard and Poor's rates issues if the issuer pays; Moody's rates issues whether the issuer pays or not - their stance is that they are Moody's Investors Services, and their ratings are a service to the investor (though paid for by the issuer).
Morningstar rates:
Mutual Funds
Mill rate
One mill = .001; 18 mills = .018. Taxes are based on assessed valuation, not fair market value. .018 x $180,000 = $3,240. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.
Who insures Municipal Bonds?
Private Insurance Companies such as MBIA (Municipal Bond Insurance Association, Inc.) AMBAC (American Municipal Bond Assurance Corporation) FGIC (Financial Guaranty Insurance Corporation)
A pass through certificate is best described as a:
Security which gives the holder an undivided interest in a pool of mortgages The mortgage payments are "passed through" to the certificate holders.
Which of the following securities would be assigned a "P" (Prime) rating? A: Commercial Paper B: Tax Anticipation Note C: Common Stock D: Corporate Bond
The best answer is A. Commercial paper is rated by Moody's on a P-1,2,3, and NP ("Not Prime") scale. Municipal short-term notes are rated by Moody's on an MIG-1,2,3, and SG ("Speculative Grade") scale. Long-term bonds are rated by Moody's on an "ABC" scale.
Which of the following trades settle in "clearing house" funds? I General Obligation Bonds II U.S. Government Bonds III Agency Bonds IV GNMA Pass-Through Certificates A: I only B: I and II C: II and IV D: III and IV
The best answer is A. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.
The money market instrument with the shortest maturity is: A: Federal Funds B: Eurodollar Certificates of Deposit C: Commercial Paper D: Treasury Bills
The best answer is A. Federal Funds are overnight loans of reserves from bank to bank. This is the shortest maturity for a debt obligation.
The current yield of a bond: A: increases as bond market prices decline B: increases as bond market prices increase C: is unaffected by changes in market interest rates D: will vary with the earnings of the issuer
The best answer is A. The current yield is the stated rate of interest as a percentage of market value. It will change as bond prices move - if bond prices rise, the current yield falls; if bond prices fall; the current yield rises.
Treasury Bills are issued for all of the following initial maturities EXCEPT: A: 1 week B: 8 weeks C: 13 weeks D: 26 weeks
The best answer is A. Treasury Bills are issued in initial 4 week (1 month); 8 week (2 month); 13 week (3 month); 26 week (6 month); and 52 week (12 month) maturities.
Which of the following statements are TRUE regarding CMO "Planned Amortization Classes" (PAC tranches)? I PAC tranches reduce prepayment risk to holders of that tranche II PAC tranches increase prepayment risk to holders of that tranche III Principal repayments made earlier than expected are applied to the PAC prior to being applied to the Companion tranche IV Principal repayments made later than expected are applied to the PAC prior to being applied to the Companion tranche A: I and III B: I and IV C: II and III D: II and IV
The best answer is B. "Plain vanilla" CMOs are relatively simple - as payments are received from the underlying mortgages, interest is paid pro-rata to all tranches; but principal repayments are paid sequentially to the first, then second, then third tranche, etc. Thus, the earlier tranches are retired first.
A municipality has a G.O. bond debt limit of $500 million. It has $300 million of G.O. debt outstanding. It now wishes to issue another $100 million of G.O. bonds. The new debt issue is known as a(n): A: Junior lien debt B: Parity bond C: Par bond D: Senior lien debt
The best answer is B. A municipal "parity" bond is one that has an equal claim on tax collections or revenues as other obligations of that issuer. For example, 2 issues of revenue bonds of the same issuer are on parity with each other if the same pledged revenues are the security for each bond issue.
25 Basis Points equal: A$.25 B$2.50 C$25.00 D$250.00
The best answer is B. One basis point = .01% in interest, or .01% of $1,000 par in annual interest = $.10. 25 basis points equal .25% of annual interest on a $1,000 per bond = $2.50.
All of the following agencies may issue securities EXCEPT: A: TVA B: FRB C: FHLMC D: FHLB
The best answer is B. The FRB - Federal Reserve Bank does not issue bonds. It is the nation's central bank. TVA (Tennessee Valley Authority). FHLMC (Federal Home Loan Mortgage Corporation), and FHLB (Federal Home Loan Bank)
A 10 year 4 3/4% Treasury Note is quoted at 95-11 - 95-15. The note pays interest on Jan 1st. and Jul. 1st. A customer buys 10M of the notes. Approximately how much will the customer pay, disregarding commissions and accrued interest? A$9,511.00 B$9,534.38 C$9,546.88 D$9,576.23
The best answer is C. "10M" means that the customer is buying $10,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 95 and 15/32nds = 95.46875% of $10,000 par = $9,546.88.
A municipality would defease its debt with all of the following EXCEPT: A: U.S. Government securities B: U.S. Government agency securities C: AAA Municipal securities D: Bank certificates of deposit
The best answer is C. A municipality will defease its debt with securities of the highest credit rating, that provide the highest interest income to the municipality (since this interest income will be used to pay the interest expenses on the municipality's outstanding bonds that have been defeased). Acceptable securities to the bondholders are U.S. Governments, Agencies, and sometimes (rarely) bank certificates of deposit. AAA municipals would not be used because their yield is lower than governments (since the interest is exempt from Federal income tax, while the others are taxable).
A debt obligation issued by a municipality for the benefit of a corporate user is a(n): A: overlapping debt B: double barreled debt C: industrial development debt D: moral obligation debt
The best answer is C. Industrial development bonds are issued by municipalities to build facilities that are leased to corporate users. These are a type of revenue bond where the lease payments made by the corporate lessee are the source of funds to pay debt service on the issue.
The interest income earned on which of the following municipal bonds would be included in the alternative minimum tax computation? A: School District Bond B: Turnpike Revenue Bond C: Industrial Revenue Bond D: Water District Revenue Bond
The best answer is C. The interest income derived from "non-essential use" private purpose revenue bonds is included in the alternative minimum tax computation. Industrial Revenue Bonds fall into this category. Public purpose bonds, such as G.O.'s, and public facility revenue issues are not subject to the alternative minimum tax (AMT).
The nominal yield of a bond: A: increases as bond market prices decline B: decreases as bond market prices increase C: is unaffected by changes in market interest rates D: will vary with the earnings of the issuer
The best answer is C. The nominal yield is the stated rate of interest as a percentage of par value. It does not change as bond prices move. However, the current yield and yield to maturity will be affected by changes in bond prices.
A security which gives the holder an undivided interest in a pool of mortgages is known as a(n):
pass through certificate
