Textbook Chap 5 (SIE)

May Eurodollar bonds later trade in the US?

Yes

Local general obligation bonds

General Obligation (GO) bonds are backed by the issuer’s ______________ and their ability to levy _____.

full faith, taxes

By what type of taxes are state general obligation bonds backed?

Income, sales, or gasoline tax, but also licensing fees and fines

List some examples of marketable Treasury securities

T-bills, t-notes, t-strips, tips, and cash management bills

Standard and Poor’s four rating for municipal notes are ______, ______, ______, _______.

SP-1+, SP-1,

What system is used for issua

List some short-term interest rates.

Discount rates, fed funds rate, prime rate, and the London Interbank Offered Rate

The ma

In a ___, a dealer sells bonds to another dealer and agrees to repurchase them at a specific time and price

Describe an asset backed security.

A security value and income are collateralized by group of assets, usually bank receivables (eg mortgages)

Money-market securities have a maturity of _________.

one year or less

________ is short-term, unsecured corporate debt which typically matures in 270 days or less

Commercial Paper

List the Government Sponsored Entities (GSEs) that issue securities which are not basked exclusively on mortgages

Federal Farm Credit Bank (FFCBs), Federal Home Loan Banks (FHLB), and Student Loan Marketing Association (SLMA)

T/F: When deflation occurs (a decline in CPI), the principal value of TIPS will decrease

True. However, the principal value will not decrease below par

T/F: Junk bonds typically offer lower yields

False. Since the is more likely to default, junk bonds offer a higher rate of return

what is the proper order of liquidation for a corporation of bankruptcy?

Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and they common.

What are the two methods by which municipal bonds are sold in the primary market (as new issues)?

1) Negotiated sales and 2) Competitive sale

What are T-STRIPS?

Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons

In a _____ sale, an issuer invites underwriters to compete against one another by submitting bids for the issue.

competitive

What is a suitable investment for a conservative client seeking monthly income?

A GNMA Fund, since income is typically paid monthly

List the types of secured corporate bonds.

Mortgage bonds, equipment trust certificates, collateral trust bonds and asset backed securities

What is a Tax Anticipation Note (TAN)?

Municipal note issued in anticipation of future tax receipts (eg real estate taxes)

A ___________ is a revenue bond backed by one specific tax.

special tax bond

T/F: FNMA and FHLMC securities are backed by the full faith and credit of the US Treasury

False. GNMA securities are government guaranteed, but FNMA and FHLMC securities are not.

Though subject to federal tax, interest on Treasuries is exempt from ______ and ______ tax.

state, local

What two sources are used to pay debt service on a double-barreled bond?

Revenue dollars and tax dollars

MIG stands for _____________.

Municipal Investment Grade

What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?

98 and 24/32. Convert fraction into a decimal 24/32 = .75. Now multiply $100 by 98.75% = $98.75

How is interest on Treasuries treated for tax purposes?

Exempt at the state and local level., but subject to federal tax

Why are CMBs issued?

To finance the US Government on a very short-term basis (often day-to-day)

T/F: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness

True

In a liquidation, place the following in priority: secured creditors, common shareholders, debentures

Secured creditors, debentures (unsecured creditors), then common shareholders

Identify the acronym: BA

Banker’s Accetance

Each payment from FHLMC will represent both ________ and _________.

Principle, interest

How often do pass-through certificates make payments?

Monthly

A competitive bid placed at a Treasury auction will indicate both ________ and _______.

quanti

What price do non-competitive bidders agree to pay at a Treasury auction?

The lowest price (highest yield) of the accepted competitive bids

What is a Revenue Anticipation Note (RAN)?

Municipal note that will eventually be paid from future federal or state subsidies

A bond backed by a charge to benefiting property owners is called a ____________________.

special assessment bond (eg water/sewer system)

Are debentures considered secured or unsecured?

Unsecured. They are backed only by the issuer’s full face and credit

T/F: The interest rate on TIPS is fixed, but the principal may be adjusted

True

Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $______

$100,000

In a ________ sale, an issuer selects the lead underwriter or senior manager that will sell the issue to the public

negotiatied

The type of bond where bondholder have a lien on real property is called a

What are some examples of tax-free money-market instruments?

Municipal notes and tax-exempt commercial paper

What are the two general typed of Treasuries?

1) Marketable (negotiable) and 2) Non-marketable (non-negotiable)

Identify the acronym: GO

General Obligation (bond)

T/F: Marketable Treasury securities can be bought and sold between investors.

True

Revenue bonds are backed by ________________ generated by ______________.

Specific revenue (user fees), project or facility

At a Treasury aution,

In a liquidation, place the following in priority: preferred shareholders, unsecured creditors, current wages

Current wages, unsecured creditor

What bond would be issued to build a facility for a private company?

Industrial Development Revenue (IDR) bond

T/F: All municipal bonds are exempt from federal taxes

False, Certain bonds are not tax exempt

All winners of a Treasury auction will ultimately pay the _____ price of the ______ competitive tenders.

lowest, accepted

Fixed-income investors receive _________, while stockholders receive _______.

interest, dividends

How does the Dutch Auction set the interest rate of Auction Rate Securities?

It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).

May Eurodollar bonds be issued in the US?

No, and they are not registered with the SEC

T/F: Interest paid on GNMA, FNMA, FHLMC, and SLMA agency bonds is fully taxable to investors.

True. The interest is taxed at the federal, state, and local level

In a liquidation, place the following in priority: warrants, preferred shareholders, common shareholders

Preferred shareholders, common shareholders, then warrants

The most common security that’s issued by government agencies is a mortgage-backed _____ certificate

pass-through

What is a Bond Anticipation Note (BAN)?

Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond

T/F: Collateral Trust Bonds are backed by the stock of the issuing corporation

False. The stock pledged must be that of a separate company

What is a guaranteed bond?

A bond that’s secured by another corporation’s guarantee that it will pay interest and principal (if necessary)

When analyzing GO bonds, what are some important considerations?

Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities

Name some of the different types of money-market instruments.

T-Bills, Banker’s Acceptance (BAs), Commercial Paper, Negotiable CDs

How is interest on municipal bonds treated for tax purposes?

Federally tax-exempt, but may be subject to state and local tax

The principal value of TIPS may be adjusted based on changes to the _____________.

Consumer Price Index (CPI)

What are Auction Rate Securities (ARS)?

Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction

How often do GNMA pass-throughs make payments?

GNMA pass-throughs make payments monthly

What are TIPS?

Treasury Inflation-Protected Securities

What risk is primarily associated with mortgage-backed securities?

Prepayment risk

The minimum face value of T-Bill, T-Note or T-Bond is $____

100

Municipal bond interest is exempt form ______ tax

federal

What bonds are dollar-denominated, US registered, and issued by multinational companies and foreign governments?

Yankee Bonds

What does ownership of a GNMA pass through certificate represent?

An undivided interest in a pool of residential mortgages

T/F: Interest paid on corporate bonds is entirely tax-exempt

False. Corporate bond interest is taxed at the federal, state, local level

How is interest on corporate bonds treated for tax purposes?

Fully taxable (taxed at the federal, state, and local level)

What is the maturity range of a T-Bond?

More than 10 years

T/F: Individual investors typically place competitive bids at a Treasury auction

False. small investors typically place non-competitive bids, which do not indicate a price

Each payment from GNMA will represent both ______ and ________.

principal, interest

What is a specific risk that may be attributed to a GNMA fund?

Prepayment risk. This is a risk that mortgages may be paid off early

Moody’s rates municipal notes using _____, _____, _____, _____.

MIG1, MIG2, MIG3, SG

T/F: Long-term CDs are considered money-market instruments

False. Since long-term CDs mature in over one year, they are not money-market instruments

Is an income bond appropriate for a client who desires income?

No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income

T/F: Agency securities are typically AAA rated.

true

In a corporation, _______ stockholders have the most junior claim to assets

common

T/F: Agency-backed CMOs have high credit ratings

True. They are usually highly rated because of the collateral backing them

What are some examples of rolling stock used to back a bond offering?

Airplanes, trucks, railroad cars

T/F: The credit of an IDB is based on the credit of the municipality

false. the rating is based on the corporation make the lease payments

What are Eurodollar bonds?

Dollar-dominated bonds issued outside the US

For a Treasury auction, what’s the difference between a competitive bid non-competitive bid?

Competitive bids indicate both a quantity and price, while non-competitive bids only indicate a quantity

Describe a T-STRIP

A long-term (greater than one year) zero-coupon that’s backed by the full faith and credit of the US Treasury

What type of municipal bond is subject to a debt ceiling (limit) ?

General obligation (GO) bonds are subject to dept limits since they’re paid using tax revenue

T/F: If revenue falls short, payments on moral obligation bond only begin with legislative approval

true

The rate charged on overnight loans on a bank-to-bank basis is referred to as the ______ rate.

fed funds

What is a Grant Anticipation Note (GAN)?

Municipal note issued in anticipation of receiving government funding in the form of a grant

What is the maturity range of a T-Note?

2 to 10 years