Ch3: Types of Bonds

U.S. Virgin Islands municipal bonds (along with Guam and Puerto Rico) are 

triple‑tax‑free for all U.S. investors

A Variable Rate Demand Obligation is

a long term municipal bond whose interest rate resets usually daily or weekly and that gives investors a put feature allowing them to sell it back to the issuers at part on short notice

Commercial paper is

highly liquid, matures in 30-270 days, unsecured, and issued by many types of large, creditworthy corporations, not just banks.

US Agency Securities pay … as Treasuries, are taxable at the … levels, trade …, and have … yields than Treasuries

pay on the same schedule as Treasuries, are taxable at the federal and state levels, trade on the secondary market, and have slighly higher yields than Treasuries

Bankers’ Acceptances are 

money market instruments used to finance international trade, especially import/export transactions

T bills are … that are sold at a … and therefore quoted on …

T bills are short term, zero coupon securities that are sold at a discount and therefore quoted on a discount yield basis.

T notes and T bonds are pay … interest and are quoted at …

T notes and T bonds are pay semiannual interest and are quoted at a percentage of par.

A Tax Anticipation Note (TAN) is

a short‑term municipal note issued in anticipation of future tax collections that will be used to repay the note.

A Revenue Anticipation Note (RAN) is a

short‑term municipal note issued in anticipation of incoming non‑tax revenues, such as fees or state aid, which will retire the note.

A Bond Anticipation Note (BAN) is

a short‑term municipal note issued to provide interim financing until a long‑term bond issue is sold to pay it off.

Large time deposits are … and they trade in the … because …

negotiable certificates of deposit (CDs) with denominations of $100,000 or more, issued by banks, and they trade in the money market because they are short‑term and highly liquid.

True or false: The number of municipal securities is far larger than listed equities.

true

True or false: Dealers of municipals do not register at market makers.

true

True or false: Munis are readily available in the secondary market.

false

Treasury bills are federally taxable but are/aren’t state tax exempt.

are state tax exempt

All treasuries are just taxable at the federal level.

all treasures are just taxable at the fedeal level.

Federal Farm Credit Bank bonds are federally taxable but are/aren’t state tax exempt.

are

Federal Home Loan Mortgage Corporation notes are federally taxable but are/aren’t state tax exempt.

aren’t

True or false: Most Agencies (FHLMC, FNMA) are fully taxable

true

Corporate bonds are quoted in … point increments

1/8th

Government bonds are quoted in … increments

1/32rd

Municipal revenue bonds are/aren’t not subject to debt limits because they are backed by project revenues, not taxes.

aren’t

Corporate bonds generally yield … than U.S. government and agency securities because …

more than us gov and agency securities because higher credit risk (corporations) means higher yields

Can Asset Backed Securities be backed by corporate equipment?

no

Can Asset Backed Securities be backed by credit card receivables?

yes

Can Asset Backed Securities be backed by auto loans?

yes

The Trust Indenture Act of 1939 applies to corporate issues of $… million and ,,,, requires a … (an indenture) signed by … that ,,,, and requires that a … be appointed for ,,,, so that the rights of bondholders are not …

The Trust Indenture Act of 1939 applies to corporate issues of $50 million and above, requires a formal written agreement (an indenture) signed by both the bond issuer and the bondholder that fully discloses the particulars of the bond issue, and requires that a trustee be appointed for all bond issues, so that the rights of bondholders are not compromised.

Analysis of the tax collections of a municipality are most relevant to … bonds because …

Analysis of the tax collections of a municipality are most relevant to GO bonds because they are backed by the full taxing power of the municipality

To get the dollar price of T notes and T bonds,

first convert the quote form 32nds to a decimal, then multiply by $1000, then multiply by the number of shares bought

U.S. Treasury interest is only taxable at the federal level, so it is exempt from state and local taxes

true

Corporate bond interest is … taxable at …l levels, so corporates must offer .. yields to …

Corporate bond interest is fully taxable at federal, state, and local levels, so corporates must offer higher yields to compensate for the heavier tax burden.

Municipal bond interest is exempt from federal income tax and may also be state‑tax‑exempt if you live in the issuing state, which is why muni yields are typically ,,, than corporates.

lower

Agency bond interest is fully taxable at all levels, and agencies typically yield …than Treasuries

more

… is the only one backed by the full faith and credit of the U.S. government.

Ginnie Mae

All US agencies offer slightly … yields than Treasuries

higher

Freddie Mac →

Fully taxable, slightly higher yield, not backed

Fannie Mae →

Fully taxable, slightly higher yield than Treasuries, not backed

… are unsecured corporate bonds and are paid last among bondholders if the company fails.

subordinated debentures

The conversion price is set

when the bond is issued

The conversion value is

the current value of the bond if it was converted today

The conversion ratio equals

par value / conversion price.

The conversion premium is calculated as

the spread between the market price of the convertible bond and the price at which it can be converted, expressed as a percentage.

The bond … is the legal agreement between bond issuers and bond holders.

indenture

Unsecured bonds are also known as

debentures

The value of the conversion privilege of a convertible bond is based on

based on the value of the underlying common stock, as the investor can exchange the bond for the shares.

The parity price is where investors

are indifferent to owing the bond versus the common shares.

First to last paid liquidation priority:

secured bondholders, unsecured bondholders, subordinated debentures, preferred shareholders, then common shareholders

The Trust Indenture Act of 1939 requires corporate issuers to appoint…

appoint an independent trustee to act for the benefit of the bondholders.

Convertible bonds usually have … coupon rates than comparable nonconvertible bonds, their holders are … of the corporation, and if the stock price falls so low that conversion is unattractive, the bonds trade solely on their inherent value as straight bonds.

Convertible bonds usually have lower coupon rates than comparable nonconvertible bonds, their holders are creditors of the corporation, and if the stock price falls so low that conversion is unattractive, the bonds trade …

Provisions in credit agreements and indentures intended to protect against the deterioration of the borrower/issuer's credit quality are known as

covenants

The … exclusively regulates corporate debt securities and requires that a … be established between the issuer and the trustee on behalf of the bondholders to protect the bondholders' rights.

The Trust Indenture Act of 1939 exclusively regulates corporate debt securities and requires that a trust indenture be established between the issuer and the trustee on behalf of the bondholders to protect the bondholders' rights.

Convertibles are classified as … debt

subordinated

A Eurodollar bond is

a bond denominated in US dollars but issued and traded outside the US

A … is a bond denominated in US dollars but issued and traded outside the US

eurodollar bond

The Securities Exchange Act of 1934 governs

the trading of U.S. securities in the secondary market.

The Glass-Steagall Act of 1933 (officially the Banking Act of 1933) was a law that

established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms.

… established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms.

the glass-steagall act of 1933