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Purchasing power risk is the risk that ________ INFLATION will cause interest rates to increase. Therefore, bond prices will ______.

As for Treasury "TIPS" ( _____ ____ ____ _____ ), the ______ amount of these securities is adjusted _______ with the ______ ___ ________.

Even though the interest rate is fixed, the holder receives a higher _______ _______, due to the increased ________ amount.
When the bond matures, the holder receives the _____ principal amount.
Thus, there is no ________ ________ risk with these securities.

Treasury STRIPS (meaning ______ _____ ______ _____ _____) and ________ ______ are _____ ________ are _____ coupon Treasury obligations - these have the ______ level of _________ ______ risk.

In contrast, 6 month Treasury bills have a ______ ( low or high) level of purchasing power risk. Since they will mature at par in the near future, their value cannot _____ very far ______ this if ______rates rise.

Purchasing power risk is the risk that INFLATION will cause interest rates to increase. Therefore, bond prices will. FALL

As for Treasury "TIPS" TREASURY INFLATION PROTECTION SECURITIES the PRINCIPLE amount of these securities is adjusted with the RATE OF INFLATION.
Even though the interest rate is fixed, the holder receives a higher INTEREST PAYMENT due to the increased amount.
When the bond matures, the holder receives the higher PRINCIPLE AMOUNT.
Thus, there is no PURCHASING POWER risk with these securities.

Treasury STRIPS (SEPERATE TRADING of REGISTERED INTEREST and PRINCIPLE SECURITIES are ZERO-coupon Treasury obligations - these have the HIGHEST level of PURCHASING POWER risk.

In contrast, 6 month Treasury bills have a ( low or high) (LOW) level of purchasing power risk. Since they will mature at par in the near future, their value cannot FALL very far BELOW this if INTEREST rates rise.

Which of the following would be a quote for a railroad bond?

A. 101.25
B. 101-8
C. 101 1/4
D. 101 4/16
A railroad bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Choice B is a U.S. Government bond quote in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond.
Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

C. 101 1/4

A railroad bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Choice B is a U.S. Government bond quote in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond.
Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

Which investment gives the least protection against purchasing power risk?

A. 6 month Treasury Bill
B. 10 year Treasury Note
C. 10 year Treasury "TIP"
D. 10 year Treasury "STRIP"

D. 10 year Treasury "STRIP"

Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities. Treasury STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk. In contrast, 6 month Treasury bills have a low level of purchasing power risk. Since they will mature at par in the near future, their value cannot fall very far below this if interest rates rise.

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Municipal bond traders execute transactions in all of the following ways EXCEPT:

A. on the floor of recognized exchanges
B. with bank dealers in the over-the-counter market
C. with brokerage wire houses in the over-the-counter market
D. with municipal broker's brokers

A. on the floor of recognized exchanges
Municipal bonds are traded in the over-the-counter market - with bank dealers, other brokers, as well as with municipal broker's brokers. They are not traded on national stock exchanges.

$$

Which of the following statements are true regarding municipal bonds that have been called?

I Interest ceases to accrue on the bonds
II Interest continues to accrue on the bonds
III The holder may redeem the bonds at anytime
IV The holder may only redeem the bonds on a regular semi-annual interest payment date

A. I and III
B. I and IV
C. II and III
D. II and IV

A. I and III

I Interest ceases to accrue on the bonds
III The holder may redeem the bonds at anytime

If a bond issue is called, interest ceases to accrue as of the date specified in the call, and the bond can be tendered anytime thereafter, at which point the bondholder will be paid par value plus any specified call premium.

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If Treasury bill yields are dropping at auction, this indicates that:

I interest rates are falling
II interest rates are rising
III Treasury bill prices are falling
IV Treasury bill prices are rising

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV
I interest rates are falling
IV Treasury bill prices are rising

If Treasury bill yields are dropping at auction, then interest rates are falling and debt prices must be rising.

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A customer buys a new issue municipal bond with a dated date of January 1, settling on February 1st. The first interest payment is due March 1st. How many days of accrued interest must the customer pay to the underwriter?

A. 0
B. 30
C. 31
D. 60

B. 30
The issue is dated Jan 1st, with the first interest payment due Mar 1st (short first interest payment). Interest accrues from the dated date up to, but not including, the settlement date of February 1st. Since accrued interest on municipals is calculated on a 30 day month / 360 day year basis, there are 30 days counted in January - not 31. Since the customer bought the bonds from the underwriter, settling on Feb 1st, he must pay 30 days of accrued interest to the underwriter on settlement date.

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Which of the following statements are true about Treasury Receipts?

I An investment in Treasury Receipts has no reinvestment risk

II An investment in Treasury Receipts is subject to reinvestment risk

III The interest income on Treasury Receipts is subject to Federal income tax annually

IV The interest income on Treasury Receipts is subject to Federal income tax at maturity

A. I and III
B. I and IV
C. II and III
D. II and IV

> NO REINVESTMENT RISK
> ANNUAL TAXED
> AT MATURITY (INTEREST ACCUMULATED) ADJUSTED COST

A. I and III

I An investment in Treasury Receipts has no reinvestment risk

III The interest income on Treasury Receipts is subject to Federal income tax annually

Treasury Receipts are, essentially, zero-coupon obligations, that are purchased at a discount, and which are redeemable at par at a pre-set date. Thus, there is no reinvestment risk, since semi-annual interest payments are not received. The implicit rate of return is locked-in when the security is purchased, and the customer will earn that rate of return if the security is held to maturity.

The annual accretion amount is taxable, since the underlying securities are U.S. Governments. At maturity, the receipt will have an adjusted cost basis of par, and will be redeemed at par, for no capital gain or loss.

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If a member firm wishes to offer structured products to its customers, which of the following procedures are required?

I The member must perform a reasonable basis suitability determination before the product can be recommended to some of the member's customers

II The member must perform a customer specific suitability analysis in order to make a recommendation of a structured product to an individual customer

III The member must have procedures to determine that the account is eligible to purchase structured products and generally must have the account approved for options trading

A. I only
B. I and II only
C. II and III only
D. I, II, III

D. I, II, III ALL THREE

I The member must perform a reasonable basis suitability determination before the product can be recommended to some of the member's customers
II The member must perform a customer specific suitability analysis in order to make a recommendation of a structured product to an individual customer
III The member must have procedures to determine that the account is eligible to purchase structured products and generally must have the account approved for options trading

Consider this to be a learning question. Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion, which pays interest based on the performance of a well known index such as the S & P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and each firm's version is somewhat different.
Because of the complexity of these products, FINRA requires that the member firm perform a "reasonable basis" suitability determination to evaluate the product's potential rewards and risks (relative to other similar structured products offered by other firms). Once a reasonable basis suitability determination has been completed, then the member firm can offer the structured product only to its customers that are suitable for that investment. This is "customer specific" suitability. Because of the embedded option in the product, FINRA strongly encourages member firms to use the same suitability and approval standards as it uses for options accounts when recommending structured products.

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"TIPS" = set interest RATE... not set interest AMOUNT OF INCOME... because deflation can lower the principle from which the interest rate draws upon! Ha!

Which statements are true regarding Treasury Inflation Protection securities?

I In periods of deflation, the amount of each interest payment will decline
II In periods of deflation, the amount of each interest payment is unchanged
III In periods of deflation, the principal amount received at maturity will decline below par
IV In periods of deflation, the principal amount received at maturity is unchanged at par

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV
I In periods of deflation, the AMOUNT of each interest payment will decline
[[ the interest rate is fixed but because the principle changes that AMOUNT of income from the set intrest rate changes ]]

IV In periods of deflation, the principal AMOUNT received at maturity is unchanged at par

Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. In periods of deflation, the principal amount is adjusted downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to the decreased principal amount. In this case, when the bond matures, the holder receives par - not the decreased principal amount.

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READ THE QUESTION CAREFULLY (NOTE THE KEY WORD "price" )

A basis quote for a $10,000 municipal bond with one year left to maturity has just been raised by 20 basis points. The bond's change in price will be:

A. $20.00 increase
B. $20.00 decrease
C. $200.00 increase
D. $200.00 decrease

B. $20.00 decrease
1 Basis Point = .01% = $.10 therefore 20 basis points equals .20% of par
.20% = .002 x $10,000 par = $20.

!!!!! NOTE !!!! --> that this type of question can only be asked for a bond with 1 year to maturity.

If interest rates rise by 20 basis points, this bond with 1 year to maturity should decrease in value by $20.

AGAIN - This type of question can only be asked for a bond with 1 year to maturity. If there are many years to maturity, then discounted cash flow calculations are required, which are not tested.

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When comparing the effect of changing interest rates on prices of a CMO issues versus the prices of regular bond issues, which of the following statements are true?

[[[ IT'S ALL ABOUT CHANGES IN ''expected maturity" - and how these expectations change more dramatically or not so much with CMOs due to the type of debt instruments they are. ]]]

I When interest rates rise, mortgage backed pass through certificates fall in price faster than regular bonds of the same maturity

II When interest rates rise, mortgage backed pass through certificates fall in price slower than regular bonds of the same maturity

III When interest rates fall, mortgage backed pass through certificates rise in price faster than regular bonds of the same maturity

IV When interest rates fall, mortgage backed pass through certificates rise in price slower than regular bonds of the same maturity

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV

IT'S ALL ABOUT CHANGES IN ''expected maturity" - and how these expectations change more dramatically or not so much with CMOs due to the type of debt instruments they are.

When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. BECAUSE ---- when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster.
AND .... when interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates fall, then the "EXPECTED MATURITY" will shorten, due to a higher prepayment rate than expected. If the maturity shortens, then for a given fall in interest rates, the price will rise slower.

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Under MSRB rules, municipal securities traders that participate in secondary market joint accounts:

[[[ KEY = "JOINT ACCOUNTS" ]]]

I may disseminate quotes severally for the securities
II may not disseminate quotes severally for the securities
III may indicate that only one market exists for the securities
IV may not indicate that only one market exists for the securities

A. I and III
B. I and IV
C. II and III
D. II and IV

.

C. II and III
II may not disseminate quotes severally for the securities
III may indicate that only one market exists for the securities

Municipal secondary market joint accounts are formed by municipal firms to purchase, and subsequently resell, large blocks of bonds. Any quotes disseminated for those bonds must appear as one quote (they are actually grouped and bracketed in Bloomberg to show that they represent a single source for the quote). It cannot appear that there are multiple markets for the bonds when in fact there is only one (the joint account).

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A customer in the 28% tax bracket is considering the purchase of a municipal bond yielding 8% or a corporate bond yielding 11%. Both bonds have similar maturities and credit ratings. Which statement is true?

A. The effective yield on the municipal bond is higher
B. The effective yield on the corporate bond is higher
C. Both effective yields are equivalent
D. The coupon rates for each bond are necessary to determine the effective yield

A. The effective yield on the municipal bond is higher

The statement is that the corp. bond is yielding 11%
The equivalent municipal yield is 11.11 (give attention to these details !!!)

In order to compare the tax free municipal yield to the taxable corporate yield, the two must be equalized.
.......8%............;.............
(100% - 28%) = 11.11%
Since the corporate bond is yielding 11%, the equivalent municipal yield is higher.

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The listing of current municipal bond offerings shows the following:

Cook County School District Bond
P/R @ 102 8.20 6/15/12 M'22 6.50
The call premium on the bond is:

A. 0 points
B. 2 points
C. 102 points
D. the call premium cannot be determined

B. 2 points
The call premium is 2 points. Here, the School district bonds have a coupon of 8.20% and were scheduled to mature in 2022. However, the issuer has pre-refunded (P/R) the bonds by escrowing U.S. government securities to retire the bonds prior to maturity (at the call date of 6/15/12). At that time, the bondholder will receive 102 (call premium of 2 points). The bonds are currently being offered at a price to yield 6.50%, so they are trading at a premium (coupon is 8.20%).

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All of the following would be found in a municipal bond resolution EXCEPT:

A. the issuer's duties to the bondholders
B. the nature of the obligation
C. any restrictive covenants to which the issuer must adhere
D. any costs to be paid by the issuer in connection with issuing the bonds

D. any costs to be paid by the issuer in connection with issuing the bonds
>> A BOND RESOLUTION is also called the BOND CONTRACT.
>> Any costs that the issuer incurs to sell the bonds has no bearing on the bond contract, since the bondholder is not involved in these expenses - they are solely the responsibility of the issuer.
>> The contract between the issuer and the bondholder. It spells out the nature of the obligation; the issuer's duties to the bondholders; and any restrictive covenants to which the issuer must adhere.

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Under the "market expectations" theory of yield curves, when investors expect interest rates to rise in the future, the yield curve should be doing what?

( THE THEORY is not a prediction but rather a reflection of what already looks like it's starting to happen. )

A. ascending
B. descending
C. inverted
D. flat

A. ascending
Under the "market expectations" theory of yield curves, when investors expect interest rates to rise in the future, the yield curve will have an upward slope. Conversely, when investors expect interest rates to fall in the future, the yield curve will have a downward slope. If investors are uncertain as to the future direction of market interest rates, then the yield curve will be flat.

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All of the following would be found in a municipal bond resolution EXCEPT:

A) the issuer's duties to the bondholders

B) the nature of the obligation

C) any restrictive covenants to which the issuer must adhere

D) any costs to be paid by the issuer in connection with issuing the bonds

D) any costs to be paid by the issuer in connection with issuing the bonds

In a corporate liquidation, the first to get paid is:

A. Unpaid wages and taxes
B. Secured bondholders
C. Preferred stockholders
D. Unsecured bondholders

B. Secured bondholders

FILL IN THE BLANKS ON
* ADJUSTMENT BONDS *

>> Adjustment bonds trade _____, that is, they trade without accrued ______.

>> An ADJUSTMENT BOND is a debt security that pays interest ....only if the company ______ the interest or to the extent that the company earns the interest.

>> This type of bond is usually issued by a corporation trying to reorganize its capitalization in order to avoid _______.

>> With the existing bondholders' approval, the corporation would exchange its ______ bonds for ___________ bonds, where the interest rate or par value is adjusted _________; however the new bonds pay interest only if the corporation has ______ _______ (thus, these are also known as "INCOME BONDS").

>> Adjustment bonds trade FLAT, that is, without accrued INTEREST.

>> An ADJUSTMENT BOND is a debt security that pays interest ....only if the company EARNS the interest or to the extent that the company earns the interest.
>> This type of bond is usually issued by a corporation trying to reorganize its capitalization in order to avoid BANKRUPTCY.
>> With the existing bondholders' approval, the corporation would exchange its REGULAR bonds for ADJUSTMENT bonds, where the interest rate or par value is adjusted UPWARDS; however the new bonds pay interest only if the corporation has SUFFICIENT EARNINGS (thus, these are also known as "income bonds").

What is an ADJUSTMENT bond ?

>> A bond that trades FLAT, i.e. without accrued INTEREST.

>> A debt security that pays interest ....only if the company earns the interest or to the extent that the company earns the interest.

>> A debt security usually issued by a corporation trying to reorganize its capitalization in order to avoid bankruptcy.

$$$

All of the following statements are true regarding corporate zero coupon bonds EXCEPT:

A. zero coupon bonds do not offer investors a current return
B. zero coupon bonds are usually suitable investments for Individual retirement Accounts and Self Employed Retirement Plans
C. the interest income on such obligations is not taxable until maturity
D. the rate of return for zero coupon bonds is not subject to reinvestment risk associated with interest paying issues

C. the interest income on such obligations is not taxable until maturity

Zero coupon bonds do not offer a current return; instead, the holder earns the discount on the bond over its life. This "earning" of the discount is taxed annually as interest income to the bondholder even though no physical payment is made. Zero coupon bonds are usually invested in IRAs and retirement plans since these vehicles are tax deferred, thus avoiding paying tax on interest income that isn't actually received. With bonds that make interest payments, the holder is subject to "reinvestment risk" on the interest payments. Rates may fall, causing the bondholder to reinvest the interest payments at lower rates. This risk is not present in zero coupon bonds since no interest payments are made.

REVIEW ALOUD....

MUNI BONDS
Legal Opinion by Bond Counsel
Opinion involves
a) Unqualified, or b) Qualified
Usually Serial Bonds & Level Debt Srvc

G.O. BONDS
..... Ad valorem backed (taxes) based on "millage."
One mill = 1/10th of 1 percent or .001
..... $1 tax due for every $1,000 assessed

.....Either "statutory" or "constitutional" limit =
percentage of assessed valuation

Special Types of Muni. Debt

SPECIAL TAX (other than an ad valorem tax) usually taxes --- cigarette, liquor, gasoline taxes (sources don't have to relate to project)

SPECIAL ASSESSMENT BONDS:
fund improvements not nec. benefit general public, but small portion of community. (EG -example, new street lights may be put in one area & only that area is assessed taxes)

MORAL OBLIGATION BONDS:
When issuer is at or above statutory debt limit and cannot legally issue more debt backed by taxing power....AND...issuer needs more financing, mainly to have the funds to "roll over" existing debt or it will default. EXAMPLE WAS situation New York City faced in 1975. SOLUTION = BOND backed by the "promise" to pay, but not the legal obligation to pay.

DOUBLE BARRELED BONDS:
backed by a REVENUE SOURCE ......&........ FAITH, CREDIT AND TAXING POWER OF MUNICIPALITY. EXAMPLE== housing bond (revenue) AND ad valorem taxing power to improve its credit rating. ----->
***KEY IS - TREATED AS A G.O. bond since the ultimate source of payment is taxing power.
**NOTE !!! OFTEN TRICK ON EXAM -----> -- "double-barreled" sometimes * erroneously** used in reference to bonds secured by any two sources of revenue. BEWARE OF THIS TRICK ON THE EXAM!

LEASE RENTAL BOND:
BOND to finance office construction where user is a state or city agency. Rents are revenue source and user is generally obligated to appropriate the funds for the lease payments from general tax revenues.

IDBs =
INDUSTRIAL DEVELOPMENT BONDS:
issued by a state, city, or local agency to build an industrial facility leased to a private company. The lease payments are the revenue source. Guaranteed by the private user.

BABs - BUILD AMER. BONDS:
1) taxable / user gets 35% 2) Fed. Tax Credit on Interest Paid 3) Usually 1 year to maturity

BANs BOND ANTICIP. NOTES:
Issued to start capital projects; the note is paid off by the placement of the final long term bond issue.

CLNs CONSTRUCTION LOAN NOTES:
used to start building of multifamily housing projects; the note is paid off by the placement of a final long-term bond issue. The final long-term bond issue is known as the "take-out" loan, and usually with a GNMA. Usually 3 year length,

PULL FORWARD BONDS
TANs Tax Anticipation Notes RANs Revenue Anticipation Notes TRANs Tax & Revenue Anticipation Notes GANs Grant Anticipation Notes

VARIABLE RATE DEMAND NOTES / STEP UP / STEP DOWN NOTES:
-- some issuers have sold "variable rate" demand notes == with resettable interest rates.
>>>issuer has the right to reset the interest rate daily or weekly based on a given index.
>>> At the reset point, note holder can redeem the note at par or holding it for the next period (1 day or 1 week) at the new interest rate. Because the interest rate can either be "stepped-up" or "stepped-down"

TAX EXEMPT COMMERC. PAPER (BACKED BY LINE OF CREDIT):
two unusual forms of short term municipal financing. Some issuers have sold "tax-exempt commercial paper" with very short maturities (under 30 days). To make these marketable, they are sold backed by a bank line of credit. Thus, if the municipal issuer cannot pay, the bank is obligated to pay.
VARIABLE RATE NOTES have almost no market risk.
Unlike bonds with fixed interest rates, such "reset" bonds will show very little price fluctuation in response to market interest rate movements, since the interest rate is being reset to the prevailing market rate daily or weekly. Thus, the price tends to stay at, or close to, par.

...

READ ALOUD

CORP BONDS
A. Feasability_Study
B. Trust_Indenture (requirement for corp issues under Trust Indenture Act of 1939 (Muni.s exempt from this act.)
C. Bond Contract
D. Bond council - all bonds issued under a "bond contract" prepared by the bond counsel.

BOND CONTRACT
1. "authorizing resolution" (bond resolution) ... allows sale of the securities.
2. "security agreement" pledging income source (e.g. full faith, credit, taxing power for a G.O. bond, specified revenues for revenue bond)
3. most have "Trust Indenture" (contract btwn issuer & trustee)

TRUST INDENTURE

>> Maintenance Covenant:
promise by the issuer to maintain the facility in good repair

>> Rate Covenant:
promise by the issuer to maintain fees for using the facility at a high enough level to cover debt service. If fees are not sufficient, the issuer is obligated to raise rates.

>> Segregation of Funds:
promise by the issuer to keep the revenues collected from and monies expended on running the facility separate from other accounts.

>> Maintenance of Books and Records Covenant:
Promise to maintain proper record keeping of accounts.

>> No Sale or Encumbrance:
promise by the issuer not to sell the facility or to allow liens to be placed on the facility

Revenue Pledge
....outlines how issuer will apply collected revenues. _______"Flow of funds"________
>> Operation and Maintenance Fund:
Monies to run the facility are deposited in this fund from the Revenue Fund.
Net revenue pledge / Gross revenue pledge: Bondholders don't have claim to "gross revenues,"... rather only "net revenues" from the facility.

>> NET REVENUES = GROSS---less---OPERAT.S & MAINT.

>> Sinking Fund:
Money to meet debt service deposited to sinking fund. Bondholders are paid from this fund.

>> Debt Service Reserve Fund:
"extra" money (usually one yr worth) to pay bondholders if revenues insufficient. (If depleted, must be re-funded asap sufficient revenue)

>> Reserve Maintenance Fund:
Monies for unusual maint/replacmnt costs
Renewal and Replacement Fund: Money to pay for scheduled mjr repairs / replacement.

>> Surplus Fund: Money "left over" after other uses are exhausted (can be used any legal way by the issuer).

>> "Covenant Additional Bonds:
Promise not to issue additional bonds against facility unless ""earnings tests"" are met. If earnings high enough, additional bonds of equal status (called ""parity bonds"") can be issued. (test is called ""additional bonds test.""

>> if the bond contract has an ""open end lien"" more bonds can issued.

>> If contract is ""closed end lien,"" no additional bonds may be sold until existing bonds redeemed"

...

A municipal issuer would call an issue for which of the following reasons?
I The proceeds of the issue were never expended due to legal obstacles
II The facility built with the proceeds of the issue has been destroyed in a flood
III Interest rates have fallen sharply since the issuance of the bonds
IV Substantial funds have accumulated in the issuer's surplus account

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

ALL FOUR ................ D. I, II, III, IV

If substantial funds have accumulated in the surplus account, the issuer would use the monies to retire debt and reduce the annual interest cost. If a facility is destroyed by a flood, a catastrophe call covenant would be activated, requiring the issuer to call in the bonds. This is done since the facility can no longer generate the revenues to service the debt. If a bond issue is floated and the monies collected are never used for their intended purpose, most bond contracts require that the issuer refund the money to the bondholders. This would be accomplished by calling in the bonds.

A security which gives the holder an undivided interest in a pool of mortgages is known as a(n):

A) equity real estate investment trust

B) pass through certificate

C) first mortgage bond

D) mortgage real estate investment trust

B) pass through certificate

The question defines a pass through certificate - an undivided interest in a pool of mortgages, where the mortgage payments are passed through to the certificate holders. Real Estate Investment Trusts (REITs) are investment companies similar to closed end funds. In such an investment, one owns a trust unit; however the unit does not represent a undivided ownership interest in the underlying real estate or mortgages. Mortgage bonds are issued by corporations pledging real estate as collateral.

Most corporate bond trades are executed:
I on exchange floors
II over-the-counter
III by bond dealers
IV by specialists (DMMs)

A) I and III

B) I and IV

C) II and III

D) II and IV

II over-the-counter
III by bond dealers

Most corporate bond and municipal bond trades take place dealer-to-dealer in the OTC market. The municipal market is quite illiquid and the corporate bond market is not very active either. Such illiquid markets are better handled by dealers that will buy bonds into inventory when there are no other buyers; or sell bonds out of inventory to customers when there are no other sellers. There is very little corporate bond trading on the NYSE floor (NYSE bond trading is now handled by a matching computer).

New issues of Treasury Notes are issued in:

A) book entry only form
B) bearer form
C) fully registered form
D) registered to principal only form

A) book entry only form

The U.S. Government issues Treasury Securities in book entry form only. No physical certificates are issued.

Treasury Notes / Over 1-10 Years / Quoted In 32nds

Treasury Notes: Intermediate-term securities issued with maturities ranging from over 1 to 10 years. The notes are issued in minimum denominations of $____ of ____ value and pay interest semi-annually to registered holders. Treasury notes are quoted as a __________ ___ _____ value in 32nds. Notes are non-callable / callable


Treasury Bills / Up To 12 Months / Quoted On A Discount Yield Basis

Treasury Bills: Short-term securities issued with __, __, __, and ___ ________ maturities (this should be known as __ weeks, __ weeks, __ weeks and __ weeks as well). Treasury Bills are issued at a _______ ______ par minimum) and mature ___ ______ . The discount earned is considered to be the _______ _______. . They are quoted on a _____ ______ ______.

Taxation Of Interest Income Received: Subject To Federal Tax; Exempt State Tax

Also note that the interest income from all U.S. Government obligations is subject to Federal income tax, but is exempt from _______ ____ _______ income tax (one level of government cannot tax the other!).


Earned Discount On STRIPS Is Taxable Annually Unless Purchased In A Retirement Plan

Regarding STRIPS and TIPS, these are really only suitable for ________ _______, ____s, K________s, and other qualified ________ plans.

The tax code requires that the annual "earning" of the discount on STRIPS be reported as taxable income each year - but the owner does not get the money until _______ . People don't like to pay income tax on income that is not actually being received, so these should only be purchased in a "_____-_______ _______" - which is a ________- ______.

Similarly, the annual inflation adjustment on a TIPS is taxable each year, but this money is also not received until _______ . So again, in order not to have to pay tax annually on money that is not being received until maturity, TIPS should only be purchased in a ________ plan.

Treasury Notes / Over 1-10 Years / Quoted In 32nds

Treasury Notes: Intermediate-term securities issued with maturities ranging from over 1 to 10 years. The notes are issued in minimum denominations of $____ ____ ($100 PAR) value and pay interest semi-annually to registered holders. Treasury notes are quoted as a __________ ___ _____ PERCENTAGE OF PAR value in 32nds. Notes are non-callable / callable (NON-COLLABLE).


Treasury Bills / Up To 12 Months / Quoted On A Discount Yield Basis

Treasury Bills: Short-term securities issued with __, __, __, and ___ ________ (1, 3, 6 and 12 MONTH) maturities (this should be known as __ (4) weeks, __ (13) weeks, __ (26) weeks and __ (52) weeks as well). Treasury Bills are issued at a _______ ______ (DISCOUNT FROM) par ($_____ [$100] minimum) and mature ___ ______ [AT PAR]. The discount earned is considered to be the _______ _______. INTEREST INCOME. They are quoted on a _____ ______ ______. DISCOIUNT YIELD BASIS. .

Taxation Of Interest Income Received: Subject To Federal Tax; Exempt State Tax

Also note that the interest income from all U.S. Government obligations is subject to Federal income tax, but is exempt from _______ ____ _______ STATE AND LOCAL income tax (one level of government cannot tax the other!).


Earned Discount On STRIPS Is Taxable Annually Unless Purchased In A Retirement Plan

Regarding STRIPS and TIPS, these are really only suitable for ________ _______, ____s, K________s, and other qualified ________ plans. [RETIREMENT PLANS, IRAs, KEOGHS, and OTHER QUALIFIED PENTION plans.

The tax code requires that the annual "earning" of the discount on STRIPS be reported as taxable income each year - but the owner does not get the money until _______ MATURITY. People don't like to pay income tax on income that is not actually being received, so these should only be purchased in a "_____-_______ _______" "TAX--DEFERRED ENVELOPE" - which is a ________- ______. RETIREMENT PLAN.

Similarly, the annual inflation adjustment on a TIPS is taxable each year, but this money is also not received until _______ MATURITY. So again, in order not to have to pay tax annually on money that is not being received until maturity, TIPS should only be purchased in a ________ RETIREMENT plan.

All of the following statements are true regarding Eurodollar bonds EXCEPT:

A) Eurodollar bond payments are subject to U.S. withholding taxes
B) Eurodollar bonds are issued outside the United States
C) Eurodollar bonds are issued in bearer form
D) Eurodollar bonds pay interest and repay principal in U.S. Dollars

A. Eurodollar bond payments are subject to U.S. withholding taxes
Eurodollar bond issues are issued in bearer form and are sold overseas (in Europe), but pay in U.S. Dollars. They are not issued in the U.S. and are not subject to U.S. withholding taxes.

The smallest denomination available for Treasury Bills is:
A) $100
B) $1,000
C) $10,000
D) $100,000

A) $100
The minimum denomination on a Treasury Bill is $100 maturity amount. The minimum denomination on Treasury Notes and Bonds is also $100 maturity amount. Note that this is different than the typical minimum $1,000 par amount for other debt issues.

Minimum for
BILLS =
NOTES =
BONDS = $1000
FANNIE MAE = $25,000
FREDDIE MACK =
GINNIE MAE =

Find in the original text.

BILLS = $100
NOTES = $100
BONDS = $1000
FANNIE MAE = $25,000
FREDDIE MACK =
GINNIE MAE =

Short sales rarely occur in the trading market for which of the following securities?

A) Municipal bonds
B) Corporate bonds
C) Government bonds
D) Agency bonds

A) Municipal bonds

Municipal bonds are usually not sold short because the trading market is very limited. Unlike corporate securities and government securities which receive no special tax status, municipal bonds are typically exempt from state and local tax if purchased by a resident of that state (in addition to the federal tax exemption). Thus, trading of municipal issues is typically confined to the state in which it was issued: there is no national trading market.
Shorting a security requires the trader to buy back (and therefore replace) the exact security that was sold. This is difficult to do if there are few bonds trading at any one time. Another important reason why munis are not shorted is because most issues are serial bonds. Serial bonds mature over a sequence of years. Thus, if a bond maturing in the year 2020 is shorted, it must be replaced with a 2020 bond. Out of the total issue, there may have been very few 2020 bonds, further limiting the potential trading market.

CMO investors are subject to all of the following risks EXCEPT:

A) Interest rate risk
B) Prepayment risk
C) Extended maturity risk
D) Default risk

D) Default risk
CMO investors have almost no default risk, since the underlying mortgages are usually implicitly backed by the U.S. Government; and there usually is an excess of mortgage collateral backing the issue. The purchaser of a CMO tranch is subject to interest rate risk - if interest rates go higher, then the value of the tranch will decline. CMO tranch holders are subject to prepayment risk - the risk that the expected life of the tranch becomes much shorter due to a decline in interest rates causing homeowners to refinance and prepay their existing mortgages earlier than expected. Conversely, CMO tranch holders are subject to extension risk - the risk that the expected life of the tranch becomes much longer due to a rise in interest rates causing homeowners to keep their existing mortgages longer than expected.

Under a municipal revenue bond rate covenant, charges for the use of a facility must be set at a level sufficient to cover:
I Operation and maintenance of the facility
II Debt service and mandatory deposits to the debt service reserve fund
III Optional sinking fund deposits
IV Deposits to the reserve maintenance fund

A) I only
B) I and II
C) III and IV
D) II and III

B) I and II

I Operation and maintenance of the facility
II Debt service and mandatory deposits to the debt service reserve fund

When a revenue bond is issued under a "Net Revenue Pledge", there is usually a rate covenant that accompanies the pledge. In a Net Revenue Pledge, the issuer pledges its "net revenues" (gross revenues net of operation and maintenance costs) to the bondholders. A rate covenant is a promise to set rates for the use of a facility at a sufficient level to cover both of these items - operation and maintenance, as well as required debt service payments. There is no requirement to cover "optional" sinking fund deposits or reserve fund deposits.

Regarding the flow of funds set forth in a municipal bond contract, collected monies would first be deposited to the:

A) Operations and Maintenance Fund
B) Debt Service Reserve Fund
C) Revenue Fund
D) Reserve Maintenance Fund

C. Revenue Fund
The trust indenture of a revenue bond issue includes a "flow of funds" - meaning how revenues will be applied by the issuer. As revenues are collected, they are deposited to a revenue fund, also called a general collection account. The monies are then applied, in sequence, to the operation and maintenance account; sinking fund; debt service reserve fund; reserve maintenance fund; renewal and replacement fund; and finally to the surplus fund.

Which of the following debt securities may be issued by a corporation?
I Mortgage Bonds
II Collateral Trust Certificates
III Revenue Bonds
IV Income Bonds


A) I and IV only
B) II and III only
C) I, II, IV
D) I, II, III, IV

C) I, II, IV
I Mortgage Bonds
II Collateral Trust Certificates
& IV Income Bonds

Corporations do not issue revenue bonds - rather, these are a type of municipal bond. Corporations can issue mortgage bonds (backed by real property), collateral trust certificates (backed by a portfolio of marketable securities), and income or adjustment bonds (that obligate the issuer to pay only if there are sufficient earnings).

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

C. Industrial Revenue Bond
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).

following statements are true?
I CMOs receive a higher credit rating than the underlying mortgage backed pass-through certificate
II CMOs receive the same credit rating as the underlying mortgage backed pass-through certificate
III CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificate
IV CMOs are subject to the same degree of prepayment risk as the underlying pass-through certificate

A) I and III
B) I and IV
C) II and III
D) II and IV

C. II and III
CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificates. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranch is known with more certainty.

Which of the following would be a quote for a railroad bond?

A) 101.25
B) 101-8
C) 101 1/4
D) 101 4/16

C) 101 1/4
A railroad bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Choice B is a U.S. Government bond quote in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond.
Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

Interest income from which of the following securities is subject to State and Local tax?

A) Treasury Bonds
B) Federal National Mortgage Association Bonds
C) Federal Home Loan Bank Bonds
D) Puerto Rico Bonds

B. Federal National Mortgage Association Bonds
As a rule, interest income from U.S. Government securities is subject to Federal tax and exempt from State and Local tax. As a general rule, interest income from agency securities is subject to Federal tax and exempt from State and Local tax. However, the interest income from securities issued by the housing agencies that sell pass through certificates is fully taxable. These are:
Federal National Mortgage Association ("Fannie Mae")
Government National Mortgage Association ("Ginnie Mae")
Federal Home Loan Mortgage Corporation ("Freddie Mac")
Interest income received from bonds issued by territories or possessions is always triple exempt.

The principal advantage of purchasing a variable rate municipal note is:

A. The interest rate can be expected to remain fairly stable
B. The market value can be expected to remain fairly stable
C. The marketability risk can be expected to be lower
D. The credit risk can be expected to be lower

With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes will fluctuate up or down, depending upon market interest rates. Thus, the note always gives a yield that approximates current interest rate levels so the market price of these securities will remain fairly constant.
These notes avoid "interest rate risk", also known as market risk, since a rise in interest rates will not devalue these securities. However, they still may have marketability risk (the risk that the securities cannot be easily sold); and can have credit risk.

B. The market value can be expected to remain fairly stable

With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes will fluctuate up or down, depending upon market interest rates. Thus, the note always gives a yield that approximates current interest rate levels so the market price of these securities will remain fairly constant.
These notes avoid "interest rate risk", also known as market risk, since a rise in interest rates will not devalue these securities. However, they still may have marketability risk (the risk that the securities cannot be easily sold); and can have credit risk.

A double barreled revenue bond is one which offers investors:

A. double the normal interest rate due to the high risk factor
B. both a high rate of interest and a high level of creditworthiness
C. the choice of both term and serial maturities
D. general obligation backing in addition to a revenue pledge

D. general obligation backing in addition to a revenue pledge.

The first use of funds under a "gross lien revenue pledge" is to pay the:

A) operation and maintenance fund

B) debt service fund

C) debt service reserve fund

D) maintenance reserve fund

B. debt service fund
Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility. After the debt service is paid, then operation and maintenance is paid. Contrast this with a "net revenue pledge." Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.

Which of the following Moody's MIG ratings are considered non-investment grade?
I MIG 1
II MIG 2
III MIG 3
IV SG


A) I and II only

B) III and IV only

C) II, III, IV

D) I, II, III, IV

B. III and IV only
C. II, III, IV
D. I, II, III, IV


The best answer is B. Moody's rates municipal anticipation notes under the "MIG" (Moody's Investment Grade) ratings scale, with MIG 1 and MIG 2 being investment grades; and the non-investment grades being MIG 3 and SG ("Speculative Grade").

I ANSWERED
B) III and IV only
III MIG 3
IV SG

VERIFY - MY READING OF THE TEXT ISN'T CLEAR....

Short-Term Note Ratings
Moody's also rates short-term corporate and municipal issues for credit risk. The ratings used for short term issues are:

Commercial Paper Municipal Notes
P 1 MIG 1
P 2 MIG 2
P 3 MIG 3
NP SG


The P ratings stand for "prime" paper with P 1 being the highest and P 3 the lowest. NP means "not prime," the lowest rating. The MIG ratings stand for "Moody's Investment Grade," with MIG 1 being the highest and SG ("Speculative Grade") the lowest.

Standard and Poor's uses a different rating scale for commercial paper. It rates the paper of companies using a version of the "ABC" ratings.

New issues of short term municipal notes and bonds are available in which forms?
I Bearer
II Book Entry
III Registered to Principal and Interest

A) I only
B) II only
C) III only
D) I, II, III

B. II only
New issues of municipal notes are available only in "book entry" form. The same is true for new issues of municipal bonds.

All of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds EXCEPT:
A. Expected demand for the facility
B. Effect of competing facilities
C. Expected operating costs of the facility
D. Bond trust indenture

D. Bond trust indenture

Banker's Acceptances are:
I overnight loans available to member institutions of the Federal Reserve System
II drafts on banks used to finance imports and exports
III negotiable securities
IV non-negotiable securities

A. I and III
B. I and IV
C. II and III
D. II and IV

C. II and III
Banker's Acceptances are drafts on banks used to finance imports and exports. They can be held to maturity or can be traded (are negotiable).

When comparing CMOs to their underlying pass-through certificates, which of the following statements are true?
I CMOs receive a higher credit rating than the underlying mortgage backed pass-through certificate
II CMOs receive the same credit rating as the underlying mortgage backed pass-through certificate
III CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificate
IV CMOs are subject to the same degree of prepayment risk as the underlying pass-through certificate

A. I and III
B. I and IV
C. II and III
D. II and IV

C. II and III
II CMOs receive the same credit rating as the underlying mortgage backed pass-through certificate
III CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificate

CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificates. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranch is known with more certainty.

Which of the following would be a quote for a railroad bond?

A. 101.25
B. 101-8
C. 101 1/4
D. 101 4/16
A railroad bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Choice B is a U.S. Government bond quote in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond.
Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

C. 101 1/4

A railroad bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Choice B is a U.S. Government bond quote in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond.
Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

READ AND MEMORIZE

Bond Basics: Corporate Bond Quote Example

Corporate bonds are quoted as a percentage of $1,000 par in fractions of 1/8ths
Example: a corporate bond quoted at 99 1/8 is priced at = 99.125% of $1,000 par = $991.25
Example: a corporate bond quoted at 100 1/8 is priced at = 100.125% of $1,000 par = $1,001.25
A 1 point price movement on a bond equals 1% of $1,000 par = $10
Note that corporate bond quotes were never "decimalized." Thus, while stocks are quoted in penny increments (since the year 2000), corporate bonds are still quoted in fractions of 1/8ths (which dates back to the colonial U.S. dollar that could be fractioned into pieces of 8!)

...

READ AND MEMORIZE

U.S. Government Bond Quote ?Example

U.S. Government bonds are generally term bonds, quoted on a percentage of par basis
U.S. Government bonds are quoted as a percentage of $1,000 par in fractions of 1/32nds
Example: a U.S. Government bond quoted at 99-4 is priced at = 99 4/32nds% = 99.125% of $1,000 par = $991.25
Example: a U.S. Government bond quoted at 100-8 is priced at = 100 8/32nds% = 100.25% of $1,000 par = $1,002.50
A 1 point price movement on a bond equals 1% of $1,000 par = $10
Also note that while the equities market is quoted in penny increments (starting in the year 2000), the corporate and government bond market never moved to decimal quotes
Corporate bonds are still quoted in fractions of 1/8ths (which dates back to the colonial U.S. dollar that could be fractioned into pieces of 8!) and government bonds are quoted in 1/32nds to be more competitive, since trading volumes are higher

...

An investor believes that interest rates are peaking and wishes to buy long term fixed income securities that will assure the investor of receiving periodic payments at today's rates. The best recommendation is high grade:

A. zero coupon bonds
B. premium bonds with low call premiums
C. non-callable bonds
D. puttable bonds

C. non-callable bonds
The investor wishes to receive periodic interest payments, so zero coupon obligations are not appropriate. Furthermore, if interest rates are currently high and the investor wants to "lock-in" these high rates, he or she will want a non-callable issue. If rates drop, the issuer cannot call these bonds. Puttable bonds are of no value unless interest rates rise, devaluing the bond. Then, the holder could exercise the put option and "put" the bond back to the issuer - usually at par.

U.S. Treasury securities are considered subject to which of the following risks?
I Credit Risk
II Purchasing Power Risk
III Marketability Risk
IV Default Risk

A. II only
B. I and IV only
C. II and III only
D. I, II, III, IV

II Purchasing Power Risk

A. II only
Securities issued by the U.S. Government represent the largest securities market in the world (remember, the national debt is $16 trillion and rising) and the most actively traded. Therefore, very little marketability risk exists. Default risk and credit risk are the same - U.S. Government securities are considered to have virtually no default risk. (The government can always tax its citizens to pay the debt or can print the money to do it). All debt obligations are susceptible to purchasing power risk - the risk that inflation raises interest rates, devaluing existing obligations.

A Prime Banker's Acceptance is one:

A. rated AAA by Moody's
B. rated P 1 by Moody's
C. eligible for trading with the Federal Reserve
D. eligible for trading with commercial banks

C. eligible for trading with the Federal Reserve
.....A Prime BA is of sufficient quality to be an eligible security for Fed trading.

$$

CREDIT RISK = The risk that the _______ cannot make interest and principal payments on an issue. The ratings agencies (MOODY'S and S & P) rate bonds only for credit risk, not for any other risks.

MARKET RISK = ________ _____
(memory = "I have an *interest in yellow markers*")

MARKET RISK ....
1) applies only to _______ rate securities (including Bonds) because as the market rises, the prices of these fall,
** "________ rate bonds" do not have this risk because they ________ with the market ****
2) is greater for _______ Maturities and ________ Coupon Issues

PURCHASING POWER RISK =
(memory = "Power to inflate the balloon")
_____________ RISK
the risk that inflation will lower the value of bond interest payments and principal repayment, --- forcing prices to fall.

The only Bonds which give protection against this risk are _ _ _ _ i.e. ______________________

MARKETABILITY RISK = The risk that the security will be ________ ___ ______.
Many factors affect marketability:
1) the issue's size
2) the number of traders in the market, etc.
3) Marketability risk is virtually non-existent for Treasury bonds because the market is so large and liquid;
4) while it is a major concern in the fragmented, illiquid municipal bond market (this is covered later in this chapter).

LIQUIDITY RISK = The risk that the security can only be sold by incurring ______ ___________ ______. Generally....
a) short-term high quality issues = liquid;
b) longer term, lower quality = lesser liquidity

REINVESTMENT RISK = the risk for a long-term bond investor that ________ ________ rates are falling over that investment's time horizon. A bond investor receives semi-annual interest payments, which must be "reinvested" in additional bond purchases to maintain the overall return on that bond portfolio. As these semi-annual payments are received, they are reinvested at lower and lower interest rates - hence the term "reinvestment risk."

-----> ZERO COUPON BONDS AVOID _________________ RISK....The only bond that avoids this risk is a "zero-coupon bond." The rate of return is established by the deep discount price at which the bond is purchased. The bond grows in value towards par at maturity and there are no payments received during the investment's time horizon that must be reinvested

CREDIT RISK = The risk that the ISSUER cannot make interest and principal payments on an issue. The ratings agencies (MOODY'S and S & P) rate bonds only for credit risk, not for any other risks.


===>MEMORY NOTE 0/0 or mark/mark <==

MARKET RISK = INTEREST RATE RISK ......and
1) applies only to FIXED rate securities (including Bonds) because as the market rises, the prices of these fall,
** "VARIABLE rate bonds" do not have this risk because they CHANGE with the market ****

2) is greater for LONGER Maturities and LOWER Coupon Issues

PURCHASING POWER RISK = INFLATION RISK
the risk that inflation will lower the value of bond interest payments and principal repayment, --- forcing prices to fall.

The only Bond which gives protection against this risk are T I P S i.e TREASURY INFLATION PROTECTION SECURITY

[When there is significant inflation, market interest rates rise and this forces bond prices down. This risk is most significant for long term bonds when market interest rates rise, long term bond prices fall faster.

MARKETABILITY RISK = The risk that the security will be DIFFICULT TO SELL. Many factors affect marketability: the issue's size, the number of traders in the market, etc. Marketability risk is virtually non-existent for Treasury bonds because the market is so large and liquid; while it is a major concern in the fragmented, illiquid municipal bond market (this is covered later in this chapter).

LIQUIDITY RISK = The risk that the security can only be sold by incurring LARGE TRANSACTION COSTS. Generally, short-term high quality issues are liquid; the longer the term and lower the quality, the lesser the liquidity.

REINVESTMENT RISK = the risk for a long-term bond investor that MARKET INTEREST rates are falling over that investment's time horizon. A bond investor receives semi-annual interest payments, which must be "reinvested" in additional bond purchases to maintain the overall return on that bond portfolio. As these semi-annual payments are received, they are reinvested at lower and lower interest rates - hence the term "reinvestment risk."

-----> ZERO COUPON BONDS AVOID REINVESTMENT RISK....The only bond that avoids this risk is a "zero-coupon bond." The rate of return is established by the deep discount price at which the bond is purchased. The bond grows in value towards par at maturity and there are no payments received during the investment's time horizon that must be reinvested

$$$$$$$$$$
LIST THE ORDER OF PRIORITY IN A CORPORATE LIQUIDATION:

1
2
3
4
5
6

1st: Secured creditors such as mortgage bondholders and equipment trust certificate holders receive the proceeds from the sales of the property pledged;

2nd: Unpaid wages, taxes, and trade creditors are paid (in the order just presented);

3rd: Debenture bondholders are paid;
4th: Subordinated debenture bondholders are paid;

5th: Preferred stockholders are paid; and finally

6th: Common stockholders are paid anything that
remains.

$$$ TWO QUESTIONS $$$

1>> All of the following securities are quoted on a yield basis EXCEPT:
A) Commercial Paper
B) Treasury Bills
C) American Depositary Receipts
D) Banker's Acceptances

============

2>> What are ADRs and BAs and how are they different? And, fill in the blank:

AMERICAN DEPOSITORY RECEIPTS ARE NOT M_____ M_______ I_______!

<<<1>>>
C) American Depository Receipts
AMERICAN DEPOSITORY RECEIPTS ARE NOT MONEY MARKET INSTRUMENTS.
Money market instruments are original issue discount obligations quoted on a yield basis that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned. They are essentially shares of a foreign company, traded domestically similar to equity securities. They are dollar price quoted in 1/8ths.

<<<2>>>
DRs = American Depositary Receipts
These are negotiable securities representing ownership of the common or preferred stock of a foreign company that is being held in trust. The securities of the foreign company are deposited in a foreign branch of an American bank. Receipts (ADRs) are issued against this deposit which entitle the ADR holder to receive all the dividends and to participate in the capital appreciation of the foreign company's securities. The number of ADRs issued against the shares on deposit may or may not be on a one-for-one basis. ADRs are perhaps the easiest and most popular way for Americans to invest in the securities of foreign companies. Another name for these securities is American Depositary Shares (ADSs).

BAs = Banker's Acceptance
a money market instrument that is a time draft used to finance international trade. A bank issues a draft payable at face amount to the seller of the goods at a future date (typically 30 - 90 days in the future; the time that it takes to ship the goods to their destination). This draft can be traded at a discount to the face amount. THE DIFFERENCE BETWEEN THE FACE AMOUNT AND THE AMOUNT CHARGED BY THE PERSON SELLING IS THE INTEREST RATE TO BE PAID AT MATURITY.
The difference between the discount price and the face value is the interest on the banker's acceptance.

$$

TWO QUESTIONS

----1ST----
Define the following
P/R =
f =
zr =
9s =
cv =


----2ND----
A municipal secondary market joint account would be formed to bid on which of the following municipal bond offerings?

I General obligation bonds offered through competitive bid via an Official Notice of Sale
II Turnpike authority revenue bonds offered through a municipal broker's broker
III Sewer assessment bonds offered through a dealer in Bloomberg
IV Pollution control bonds offered through a dealer in Bloomberg

A) I only
B) II and III only
C) II, III, IV
D) I, II, III, IV

----1ST----

P/R = Pre Refunded
f = flat
zr = zero
9s = nines
cv = convertable bond


----2ND----

C) II, III, IV

Municipal secondary market joint accounts are groups of municipal dealers that are formed to buy or sell blocks of municipal bonds in the secondary (trading) market. To buy a new issue (primary market), a syndicate would be formed, making Choice I incorrect. The other transactions are all effected in the secondary market and could all be performed by municipal secondary market joint accounts.

Q. 22

Which of the following would cause the yield curve to be ascending?

A) An increase in demand for long term bonds from investors
B) An increase in the laddering of bond portfolios by investors
C) The Federal Reserve pursuing a tight monetary policy
D) Short term yields declining at the same time as long term yields are increasing

D) Short term yields declining at the same time as long term yields are increasing
An ascending yield curve is a normal curve - short Iterm yields are normally lower than long term yields. Choice D describes an ascending curve. If there is an increase in demand for long term bonds, then long term bond prices rise and their yields fall. This can cause their yields to fall below short term rates - an inverted yield curve - making Choice A wrong. If the Federal Reserve is pursuing a tight money policy, this will raise short term rates (the Fed exerts its influence at the short end of the yield curve). Again, this can cause the curve to invert - making Choice C wrong. Finally, a "laddered" bond portfolio is one that has maturities staggered at roughly even intervals - say 5, 10, 15, 20, 25 and 30 years out. Thus, every 5 years, bonds are maturing and if rates have been rising, the proceeds are reinvested at higher current rates. This gives some protection to the value of the portfolio in a period of rising interest rates. Because purchases are being made at even intervals across the yield curve, laddering should not distort the shape of the yield curve - making Choice B wrong.

$$

Q. 25
Mandatory redemption provisions of a municipal bond contract may be met by:

I Making periodic deposits to a segregated account (sinking fund)
II Advance refunding the issue
III Making a tender offer for outstanding bonds

A) I only
B) I and III
C) II and III
D) I, II, III

A) I only
Making periodic deposits to a segregated account (sinking fund)

Mandatory redemption provisions can only be met by depositing the required funds to the sinking fund. Once these monies are deposited, the issuer must use them to retire bonds as specified in the bond contract. The bonds may be retired by calling in bonds or by purchasing bonds in the open market. The issuer will buy the bonds in the open market if the price is lower than the call price including any premiums.
Advance refunding an issue or making a tender offer do not satisfy mandatory redemption provisions.

WHAT ARE THESE?

• *MBIA: Municipal Bond Insurance Association Corp.
• ***AMBAC: American Municipal Bond Assurance Corp.
• ***FGIC: Financial Guaranty Insurance Corporation
• FSA: Financial Security Assurance Corp.

"PRIVATE COMPANY" Muni. Bond Insurers.

$$


Q. 28
A MUNICIPAL VARIABLE DEMAND NOTE is called a "note" because the actual maturity is ________ - the holder, in effect, can redeem at par _______ ____ ______.

A MUNICIPAL VARIABLE DEMAND NOTE is a:

A) municipal note that may be retired prior to maturity on any interest payment date at the demand of the issuer
B) municipal bond that gives the holder a tender option feature, usually at par, as of the reset date
C) municipal note that requires the issuer to reset the interest rate to the market rate upon demand of the holder
D) municipal bond that allows the issuer to vary the repayment date, upon giving written notice to the holders

B) municipal bond that gives the holder a tender option feature, usually at par, as of the reset date

It is called a "note" because the actual maturity is UNKNOWN - the holder, in effect, can redeem at par WHENEVER HE/SHE WANTS.

A municipal variable rate demand note is a municipal bond that gives the holder the right to "put" the bond to the issuer at par, typically at the interest payment dates. The interest rate is reset, usually weekly, to an indexed rate, and thus, will vary. It is called a "note" because the actual maturity is unknown - the holder, in effect, can redeem at par whenever he or she wants. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

$$$$

What are the differences between NOTES and BONDS?
A) Length =
B) Issuers =

NOTES - medium term securities w/ maturity 2-10 yrs; Common reference = U.S. Government two to ten Treasury Notes.

BONDS - long-term debt securities or IOU issued by a corporation, municipality, or government. The purchaser of this security in the initial public offering, in effect, loans the issuer money. In return, the issuer agrees to pay interest on the loan, either at a fixed or variable rate; and to repay the principal amount (face value) at maturity. Traditionally most bonds pay interest semi-annually. However, zero-coupon bonds do not make such periodic interest payments

$$$
READ EACH QUESTION
C A R E F U L L Y

Q. 30
Which investment gives the least protection against purchasing power risk?

A) 6 month Treasury Bill
B) 10 year Treasury Note
C) 10 year Treasury "TIP"
D) 10 year Treasury "STRIP"

D) 10 year Treasury "STRIP"

Treasury STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk.

Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall.

Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities.
In contrast, 6 month Treasury bills have a low level of purchasing power risk. Since they will mature at par in the near future, their value cannot fall very far below this if interest rates rise.

$$

Fill in the blanks on..................
"STRUCTURED PRODUCTS"

Structured products are securities based on, or derived from, a _____ of securities, an _______ , or other securities, _______ or _______.

There are many types of structured products, but generally they consist of a "_______" portion, which pays interest based on the performance of a well known ______ such as the S & P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to _____ ____ ______ _____ ____ ________ (at _______ ) at maturity.
These are often marketed as debt instruments, but that is _____ _______ the case.
Structured products are created by many different brokerage firms and each firm's version is ___________ ______________.

Fill in the blanks on..................
"STRUCTURED PRODUCTS"

Structured products are securities based on, or derived from, a BASKET of securities, an INDEX, or other securities, COMMODITIES or CURRENCIES.

There are many types of structured products, but generally they consist of a "BOND" portion, which pays interest based on the performance of a well known INDEX such as the S & P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to SELL THE SECURITY BACK TO THE ISSUER (at PAR) at maturity.
These are often marketed as debt instruments, but that is NOT REALLY the case.
Structured products are created by many different brokerage firms and each firm's version is SOMEWHAT DIFFERENT.

$$
Q. 31

Which statements are true regarding structured products?
I Structured products are standardized
II Structured products are not standardized
III Structured products have a fixed maturity date (similar to a debt security)
IV Structured products do not have a maturity date (similar to an equity security)

A) I and III
B) I and IV
C) II and III
D) II and IV

C) II and III
II Structured products are not standardized
III Structured products have a fixed maturity date (similar to a debt security)

Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion, which pays interest based on the performance of a well known index such as the S & P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and each firm's version is somewhat different.

Q. 34

A municipal issuer would call an issue for which of the following reasons?

I The proceeds of the issue were never expended due to legal obstacles
II The facility built with the proceeds of the issue has been destroyed in a flood
III Interest rates have fallen sharply since the issuance of the bonds
IV Substantial funds have accumulated in the issuer's surplus account

A) I and II only
B) III and IV only
C) I, II, III
D) I, II, III, IV

D) I, II, III, IV
If substantial funds have accumulated in the surplus account, the issuer would use the monies to retire debt and reduce the annual interest cost. If a facility is destroyed by a flood, a catastrophe call covenant would be activated, requiring the issuer to call in the bonds. This is done since the facility can no longer generate the revenues to service the debt. If a bond issue is floated and the monies collected are never used for their intended purpose, most bond contracts require that the issuer refund the money to the bondholders. This would be accomplished by calling in the bonds.
An issuer would only call in bonds when interest rates have fallen, since the debt could be replaced with lower interest rate financing. An issuer would never refund its debt if interest rates have risen. (Would you go out and refinance your mortgage at a higher interest rate?)

$$
A municipal bond dealer quotes 10 year 3 1/2% Revenue bonds at 97 1/4 - 98. The dealer's spread per $1,000 is:

I $ .75
II $7.50
III 7.5 basis points
IV 75 basis points

A) I and III
B) I and IV
C) II and III
D) II and IV

D) II and IV
II $7.50 & IV 75 basis points

The spread is .75 points, which is .75% of $1,000 par, which equals $7.50. $7.50 is the same as 75 basis points, since each basis point equals $.10.

$$

Q. 37

SEE "PROSPECTUS" BELOW, THEN THE QUESTION

++++++++++++++++++++++++++++++
This announcement is neither an offer to sell nor a solicitation of an offer to buy any of these Securities.

This offer is made only by Prospectus
$5,000,000

Toga County Tote That Barge Company
10% Convertible Subordinated
Debentures due August 1, 2032

Convertible at $10.50 per share
Price 100% plus accrued interest

Copies of the Prospectus may be obtained in any State in which this security may lawfully be offered

PROVIDED BY:
Blair and Brown Morrill Bunch Sheer Brash Hash Pain Glass Dawn Wetter Seligmon Bros. E. F. Edwards Bear, Spawns Dilley, Rodd
++++++++++++++++++++++++++++

The payment of interest and principal on these bonds is secured by the:

A) full faith and credit of Toga County Corporation
B) ships and other equipment pledged as collateral by the company
C) securities of the company which have been pledged as collateral under a subordination agreement
D) mortgages on the real property owned by the corporation

A) full faith and credit of Toga County Corporation

Since these bonds are debentures, they are backed solely by the full faith and credit of the issuer. There is no property backing these bonds.

$$$$$

Which of the following statements regarding collateralized mortgage obligations are true?

I Each tranch has a different level of market risk
II Each tranch has the same level of market risk
III Each tranch has a different yield
IV Each tranch has the same yield

A) I and III
B) I and IV
C) II and III
D) II and IV

A. I and III
I Each tranch has a different level of market risk
III Each tranch has a different yield

Each tranch of a CMO, in effect, represents a differing expected maturity, hence each tranch has a different level of market risk. Since each tranch represents a differing maturity, the yield on each will differ, as well.

$$

Q. 43

The "interest" received from a zero-coupon corporate bond is:

A) accreted and taxed annually
B) accreted and tax deferred until maturity
C) not accreted and not taxed annually
D) not accreted and taxed as capital gain at maturity

A) accreted and taxed annually
The "interest" earned on a zero-coupon bond is the annual accretion of the discount. This amount is taxed annually by the IRS, even though no physical interest payment is received from the issuer. The only way to avoid annual taxation of the accretion amount is to hold the securities in a tax deferred retirement plan account.

$$$

CREDIT RISK = risk the _____ ______ _____ _______

MARKET RISK = _______ ______ _______

PURCHASING POWER RISK = __________ ________

MARKETABILITY RISK = risk an issue will be ___________ ____ ________

LIQUIDITY RISK = RISK ________ ________ IN ORDER TO SELL

REINVESTMENT RISK = RISK ________ _______ _______ ______ _________ & HARD TO GET MONEY TO RE-INVEST

ZERO COUPON BONDS AVOID ________________ The only bond that avoids this risk is a "zero-coupon bond." The rate of return is established by the deep discount price at which the bond is purchased. The bond grows in value towards par at maturity and there are no payments received during the investment's time horizon that must be reinvested.

.

CREDIT RISK = risk the ISSUER CAN'T MAKE PAYMENTS (interest and principal)

MARKET RISK = INTEREST RATE RISK

PURCHASING POWER RISK = INFLATION RISK

MARKETABILITY RISK = RISK AN ISSUE WILL BE DIFFICULT TO SELL.

LIQUIDITY RISK = RISK LARGE COSTS IN ORDER TO SELL

REINVESTMENT RISK = RISK MARKET INTEREST RATES ARE FALLING & HARD TO GET MONEY TO RE-INVEST

ZERO COUPON BONDS AVOID REINVESTMENT RISK. The only bond that avoids this risk is a "zero-coupon bond." The rate of return is established by the deep discount price at which the bond is purchased. The bond grows in value towards par at maturity and there are no payments received during the investment's time horizon that must be reinvested

$$$$

READ, THEN ANSWER THE QUESTION

"COLLECTION RATIO" = for municipalities, the percentage of taxes assessed that are actually collected by the municipality (some people don't pay their taxes!)

"DEBT TO ASSESSED VALUATION" = a the ratio of
Net overall debt
to
Assessed value of property of municipality
(ratio used to analyze credit of G.O. bond)
---------------------------------

The best measure of a municipality's ability to collect the taxes necessary to service general obligation debt is the ratio of:
A. debt per capita
B. pledged revenues to debt service
C. taxes collected to taxes assessed
D. debt to assessed valuation

C. taxes collected to taxes assessed

The collection ratio of a municipality is:
One looks for a very high ratio (better than 95%), meaning that the municipality is truly collecting the taxes it is assessing.

$$
Which characteristics make a security least subject to liquidity risk?
I Short term maturity
II Long term maturity
III Low credit rating
IV High credit rating

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV
I Short term maturity
IV High credit rating
Liquidity risk is the risk that a security can only be sold by incurring large transaction costs. The easiest securities to sell (meaning the most readily marketable) are those with high credit ratings and short term maturities.

$$$

REINVESTMENT RISK = risk that ____ _____ drop after issuance of the bonds; and that as interest payments are received over the life of the issue, they cannot be ________ at the same rate.

This risk is the greatest for ______ coupon bonds; and the lowest for _____ or ______ coupon bonds.

MARKET RISK =
1. for equity securities, the risk that ...
2. for bonds, the risk that ....
3. in portfolio management, the risk .... (also referred to as S_______ Risk)

REINVESTMENT RISK = risk that INTEREST RATES drop after issuance of the bonds; and that as interest payments are received over the life of the issue, they cannot be REINVESTED at the same rate.

This risk is the greatest for HIGH coupon bonds; and the lowest for LOW or ZERO coupon bonds.

MARKET RISK =
1.for equity securities, the risk that the value of the stocks will drop due to a sell-off in the market
2.for bonds, the risk that a rise in interest rates will cause the market prices of bonds to drop (see Interest rate risk)
3.in portfolio management, the risk inherent in a portfolio that cannot be diversified away (see Systematic risk)

When considering the purchase of municipal debt securities, investors must evaluate which of the following risks?

I Credit Risk
II Purchasing Power Risk
III Legislative Risk
IV Interest Rate Risk

ANSWER = ALL FOUR

$$$$$

Which of the following would be considered when evaluating the credit risk of a municipal revenue bond?

I Management experience
II The effect of competing facilities
III Coverage ratios
IV Collection ratios

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

C. I, II, III

I Management experience
II The effect of competing facilities
III Coverage ratios

$$$$

Which security is most subject to reinvestment risk?

A. Zero coupon bonds
B. Low coupon bonds
C. Medium coupon bonds
D. High coupon bonds

.

D. High coupon bonds
Reinvestment risk for bondholders is the risk that interest rates drop after issuance of the bonds; and that as interest payments are received over the life of the issue, they cannot be reinvested at the same rate. This risk is the greatest for high coupon bonds; and the lowest for low or zero coupon bonds.

$$$
LONG TERM NEGOTIABLE CDs are:

--- Certificates of deposit having a denomination of $___________ or ____.

--- This is a negotiable money market instrument that, unlike all other money market instruments which are original issue discount obligations, trades at _____ plus accrued interest.

--- Also, unlike other money market instruments, these can have maturities greater than ____ year, can be _______ , and the interest rate can be "_______".

Which risk is NOT associated with Long Term Negotiable Certificates of Deposit?

A. Market risk
B. Call risk
C. Reinvestment risk
D. Prepayment risk
.

LONG TERM NEGOTIABLE CDs are:

--- Certificates of deposit having a denomination of ___________ $100,000 or _____ MORE.
--- This is a negotiable money market instrument that, unlike all other money market instruments which are original issue discount obligations, trades at _____ PAR plus accrued interest.
--- Also, unlike other money market instruments, these can have maturities greater than ____ ONE year, can be _______ CALLABLE, and the interest rate can be "_______" "RESETTABLE".

THE ANSWER THE THE QUESTION IS...
D. Prepayment risk

.

$$

RE-WORD THE QUESTION IN MY ORDINARY STRAIGHT FORWARD TERMINOLOGY.

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. Call dates of the CD
Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! For example, if a customer wishes to buy a $75,000 CD, as long as the customer does not have deposits at the issuing bank in excess of $175,000 (thus not exceeding the $250,000 maximum FDIC coverage) and the CD is titled in the customer's name, then the CD would be FDIC insured.
Therefore, the bank name must be known because the customer gets only one coverage at that bank. The CD must be titled in the customer's name for the FDIC coverage to apply. Since coverage is a maximum of $250,000 per customer at each bank, the amount of the CD must be aggregated with any other customer deposits held at the bank to determine if the FDIC limit is exceeded. Call features are irrelevant to FDIC coverage.

$$
Which of the following would cause the yield curve to invert?

A. An increase in demand for long term bonds from investors
B. An increase in the laddering of bond portfolios by investors
C. The Federal Reserve pursuing a loose monetary policy
D. Short term yields declining at the same time as long term yields are increasing

.

A. An increase in demand for long term bonds from investors

"AN ASCENDING YEILD CURVE IS A NORMAL YIELD CURVE"

BECAUSE....If there is an increase in demand for long term bonds, then long term bond prices rise and their yields fall.

This can cause their yields to fall below short term rates - an inverted yield curve - making Choice A correct. An ascending yield curve is a normal curve - short term yields are normally lower than long term yields. Choice D describes an ascending curve. If the Federal Reserve is pursuing a loose money policy, this will lower short term rates (the Fed exerts its influence at the short end of the yield curve). Again, this can cause the curve to be ascending - making Choice C wrong. Finally, a "laddered" bond portfolio is one that has maturities staggered at roughly even intervals - say 5, 10, 15, 20, 25 and 30 years out. Thus, every 5 years, bonds are maturing and if rates have been rising, the proceeds are reinvested at higher current rates. This gives some protection to the value of the portfolio in a period of rising interest rates. Because purchases are being made at even intervals across the yield curve, laddering should not distort the shape of the yield curve - making Choice B wrong.

Mandatory redemption provisions of a municipal bond contract may be met by:

I Making periodic deposits to a segregated account (sinking fund)
II Advance refunding the issue
III Making a tender offer for outstanding bonds

A. I only
B. I and III
C. II and III
D. I, II, III

A. I only
I Making periodic deposits to a segregated account (sinking fund)

Mandatory redemption provisions can only be met by depositing the required funds to the sinking fund. Once these monies are deposited, the issuer must use them to retire bonds as specified in the bond contract. The bonds may be retired by calling in bonds or by purchasing bonds in the open market. The issuer will buy the bonds in the open market if the price is lower than the call price including any premiums.
Advance refunding an issue or making a tender offer do not satisfy mandatory redemption provisions.

Which statements are true regarding structured products?

I Structured products are standardized
II Structured products are not standardized
III Structured products have a fixed maturity date (similar to a debt security)
IV Structured products do not have a maturity date (similar to an equity security)

A. I and III
B. I and IV
C. II and III
D. II and IV

C. II and III
II Structured products are not standardized
III Structured products have a fixed maturity date (similar to a debt security)

Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion, which pays interest based on the performance of a well known index such as the S & P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and each firm's version is somewhat different.

A municipal bond dealer quotes 10 year 3 1/2% Revenue bonds at 97 1/4 - 98. The dealer's spread per $1,000 is:
I $ .75
II $7.50
III 7.5 basis points
IV 75 basis points

A. I and III
B. I and IV
C. II and III
D. II and IV

D. II and IV
II $7.50
IV 75 basis points
The spread is .75 points, which is .75% of $1,000 par, which equals $7.50. $7.50 is the same as 75 basis points, since each basis point equals $.10.

$$
A call premium on a bond is the amount:

I by which the bond's redemption price at maturity exceeds par
II by which the bond's redemption price prior to maturity exceeds par
III the bondholder will pay the issuer to call in bonds prior to maturity
IV the issuer will pay the bondholder to call in bonds prior to maturity

A. I and III
B. I and IV
C. II and III
D. II and IV

D. II and IV
II by which the bond's redemption price prior to maturity exceeds par
IV the issuer will pay the bondholder to call in bonds prior to maturity
A call premium is the excess over par value that the issuer will pay the bondholder to call in the bonds prior to maturity.

$$

Which of the following statements are true about Eurodollar bonds?

I The bonds are issued in the U.S.
II The bonds are issued outside the U.S.
III The purchasers are U.S. residents
IV The purchasers are foreign residents

A. I and III
B. I and IV
C. II and III
D. II and IV

D. II and IV
II The bonds are issued outside the U.S.
IV The purchasers are foreign residents
Eurodollar bonds are issued outside the U.S. and are purchased by foreigners. These bonds are denominated in, and make payment in, U.S. dollars. The bonds are not registered for sale in the U.S

$

All of the following callable municipal bonds are trading at a 5% basis. Which is MOST likely to be called?

A. 3 3/4% coupon rate callable at 103 in 2013
B. 4 1/2% coupon rate callable at 103 in 2013
C. 5% coupon rate callable at 100 in 2013
D. 6 3/4% coupon rate callable at 100 in 2013

D. 6 3/4% coupon rate callable at 100 in 2013
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).

$$$$

The feasibility study prepared in connection with a new municipal revenue bond offering is performed by the:

A. issuer
B. underwriter
C. bond counsel
D. independent consultant

(also read the answer explanation for awareness)

.

D. independent consultant
This study is performed by an independent consulting firm.

The feasibility study in a revenue bond offering is
-- a projection of building costs;
-- expected revenues; and
-- expenses.
The net result should show that the revenues anticipated from the project are sufficient to pay for both operation and maintenance of the facility and interest expense on the bonds issued to finance the construction, as well as cover the repayment of the bonds.

$$

Industrial development bonds are backed by:
I the lease obligating the private user to rent the facility for the life of the bond issue
II the unconditional guarantee of the private user
III securities pledged as collateral by the private user
IV the faith and credit of the governmental issuer

A. I and II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV

A. I and II only
I the lease obligating the private user to rent the facility for the life of the bond issue
II the unconditional guarantee of the private user

An industrial development bond is backed by the rents paid by a corporation using the facility built with the proceeds of the offering, and the guarantee of that corporation. THERE IS NO ACTUAL COLLATERAL PLEDGED TO BACK THE ISSUE.

$
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

MEMORY TIP ==>
"Generally we clear the house !!! "

A. I only
I General Obligation Bonds

CORPORATE & 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.

U.S. GOV'T 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 and agency bond trades).
Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds.

COMPANION tranches absorb the prepayment risk and extension risk out of a PAC tranch and are offered at the highest yield.

__ __ __ tranches, because they are relieved of both extension and prepayment risk, are offered at the lowest yield.

__ __ __ tranches are relieved of prepayment risk only, so they are offered at a yield that is higher than a PAC.

________ ________ tranches are not relieved of either extension or prepayment risk, so they yield less than a companion, but more than a PAC or TAC.

Arranging the CMO tranches from highest to lowest yield, the order is:

COMPANION tranches absorb the prepayment risk and extension risk out of a PAC tranch and are offered at the highest yield.

PAC tranches, because they are relieved of both extension and prepayment risk, are offered at the lowest yield.

TAC tranches are relieved of prepayment risk only, so they are offered at a yield that is higher than a PAC.
<< MEM TIP - "You can TAC on PAYMENT but you cannot TAC on extension of time."

PLAIN VANILLA tranches are not relieved of either extension or prepayment risk, so they yield less than a companion, but more than a PAC or TAC.

Arranging the CMO tranches from highest to lowest yield, the order is:

Companion
Plain Vanilla
Targeted Amortization Class
Planned Amortization Class

$

Which of the following municipal issues would be exempt from taxation of interest by the Federal Government?

I San Francisco, California - Convention Center Revenue Bond
II Miami, Florida - Sewer and Water Revenue Bond
III Nassau County, New York - Pollution Control Bond
IV Des Moines, Iowa - Baseball Stadium Revenue Bond

A. I only
B. I and IV
C. II and III
D. I, II, III, IV

.

C. II and III

II Miami, Florida - Sewer and Water Revenue Bond
III Nassau County, New York - Pollution Control Bond

Non-essential use, private purpose municipal issues are subject to Federal Income tax, via the Alternative Minimum Tax computation (AMT). The building of a convention center constitutes such a use, as does the building of a baseball stadium. Sewers, water, pollution control, and schools are all essential public uses and these issues qualify for the Federal Income Tax exemption on interest.

$$

The largest participants in the trading of U.S. Government debt include:

I Domestic money center banks
II Foreign money center banks
III Domestic Broker-Dealers
IV Foreign Broker-Dealers

A. I and II only
B. III and IV only
C. I and III only
D. I, II, III, IV

D. I, II, III, IV

ALL FOUR !!!

I Domestic money center banks
II Foreign money center banks
III Domestic Broker-Dealers
IV Foreign Broker-Dealers

Trading of government and agency securities takes place in the over-the-counter market. The participants include large commercial banks, foreign banks, U.S. Government securities dealers, full service broker firms, and the Federal Reserve.

$$

**Municipal Variable Rate Demand Notes**

I have a market value which will never go below par
II have a market value which will never go above par
III have a yield which will never fall below the stated rate
IV have a yield which will never rise above the stated rate

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV
I have a market value which will never go below par
IV have a yield which will never rise above the stated rate

Municipal variable rate demand notes are issued by a municipality.
--- The interest rate is reset to the market rate weekly; and at the reset date,
--- the holder can "put" the bonds back to the issuer at par. The minimum value of the bond is par - because of the put feature.
--->>>>Because the price of the bond cannot go below par, these bonds are not subject to market risk and the yield cannot go above the stated rate.
--- However, if interest rates fall, the price can go above par (by a small amount) and the yield can fall below the stated rate until the next reset date.

$$$$$

During a period when the yield curve is flat:

A. short term rates are more volatile than long term rates
B. long term rates are more volatile than short term rates
C. short term and long term rates are equally volatile
D. no relationship exists between short term and long term rate volatility

A. short term RATES are more volatile than long term rates
Whether the yield curve is ascending (normal), flat or descending, the true statement always is that short term RATES are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; LONG TERM "Y I E L D S" are the most volatile.

$$

Which of the following statements are true regarding a municipal bond issue that is advance refunded?

I The security that backs the refunded bonds will change after the issue is refinanced
II The bondholder's lien on pledged revenues will be defeased in accordance with the terms of the bond contract
III The marketability of the refunded bonds will increase
IV The funds to pay the debt service requirements on the refunded bonds are set aside in escrow

A. II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV

D.
ALL FOUR ARE CORRECT.

In an advance refunding:
1) the issuer floats a new bond issue and uses the proceeds to "retire" outstanding bonds that have not 'yet matured.
2) These funds are deposited to an escrow account and are used to buy U.S. Government securities.
3) The escrowed Government securities become the pledged revenue source backing the refunded bonds. These bonds no longer have claim to the original revenue source. Since there is a new source of backing for the bonds (and an extremely safe one!), the credit rating on the pre-refunded bonds increases, as does their marketability.
4) The pre-refunded bonds no longer have any claim to the original pledged revenues - and thus have been "defeased" - that is, removed as a liability of the issuer.

$$

"Takedown" =

.

Takedown is a term used in a new issue municipal bond offering, as the DISCOUNT FROM THE PUBLIC PRICE WHICH IS GIVEN ONLY TO A MEMBER OF THE SYNDICATE.

The term comes from the manager of the syndicate allowing a syndicate member to "takedown" a bond from the syndicate account at a price that is lower than the public offering price. The takedown is also referred to as the "total takedown" because it is the total of the additional takedown and the selling concession.

$

Issuers are likely to call in their debt securities when:

I new securities can be issued at lower current market interest rates
II new securities can be issued at higher current market interest rates
III during periods when there is a high level of inflation
IV during periods when there is a low level of inflation

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV
I new securities can be issued at lower current market interest rates
IV during periods when there is a low level of inflation
Issuers are most likely to call in their securities when interest rates have bottomed.

The issuer can issue new securities at lower current interest rates, and can use the proceeds to call the outstanding securities that are paying a higher rate of interest.

$

The phrase "EQUIV. TAXABLE YIELD" means =

The phrase, "EQUIV. TAX FREE YIELD" means =

The phrase "EQUIV. TAXABLE YIELD" means =

TAX FREE MUNI. YIELD / 100% - tax bracket%

The phrase, "EQUIV. TAX FREE YIELD" means =
TAXABLE YIELD X 100% - tax bracket%

$$

Which of the following statements are true about the Government National Mortgage Association (GNMA)?

I GNMA is a publicly traded corporation
II GNMA is owned by the U.S. Government
III GNMA pass through certificates are guaranteed by the U.S. Government
IV GNMA pass through certificates are not guaranteed by the U.S. Government

A. I and III
B. I and IV
C. II and III
D. II and IV

.

II GNMA is owned by the U.S. Government
III GNMA pass through certificates are guaranteed by the U.S. Government

$$

"Level debt service" - means that the issuer pays the ______ amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule).

> Since bonds are retired annually, the amount of the payment representing __________ declines annually.

> The balance of the level payment is used to pay off bonds for that year. Thus, each year, the _________ repayment amount increases.

"Level debt service" - means that the issuer pays
the SAME amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule).

> Since bonds are retired annually, the amount of the payment representing INTEREST declines annually.

> The balance of the level payment is used to pay off bonds for that year. Thus, each year, the PRINCIPLE repayment amount increases.

$$

From an issuer's standpoint, as the years progress, "level debt service" serial bond issues have:

I Decreasing interest payment amounts
II Increasing interest payment amounts
III Decreasing principal repayment amounts
IV Increasing principal repayment amounts

A. I and III
B. I and IV
C. II and III
D. II and IV

B. I and IV
I Decreasing interest payment amounts
IV Increasing principal repayment amounts

Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule). Since bonds are retired annually, the amount of the payment representing interest declines annually. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases.

$
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. Call dates of the CD

Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! For example, if a customer wishes to buy a $75,000 CD, as long as the customer does not have deposits at the issuing bank in excess of $175,000 (thus not exceeding the $250,000 maximum FDIC coverage) and the CD is titled in the customer's name, then the CD would be FDIC insured.
Therefore, the bank name must be known because the customer gets only one coverage at that bank. The CD must be titled in the customer's name for the FDIC coverage to apply. Since coverage is a maximum of $250,000 per customer at each bank, the amount of the CD must be aggregated with any other customer deposits held at the bank to determine if the FDIC limit is exceeded. Call features are irrelevant to FDIC coverage.

COMPANION tranches absorb the prepayment risk and extension risk out of a PAC tranch and are offered at the highest yield.

__ __ __ tranches, because they are relieved of both extension and prepayment risk, are offered at the lowest yield.

__ __ __ tranches are relieved of prepayment risk only, so they are offered at a yield that is higher than a PAC.

________ ________ tranches are not relieved of either extension or prepayment risk, so they yield less than a companion, but more than a PAC or TAC.

Arranging the CMO tranches from highest to lowest yield, the order is:

COMPANION tranches absorb the prepayment risk and extension risk out of a PAC tranch and are offered at the highest yield.

PAC tranches, because they are relieved of both extension and prepayment risk, are offered at the lowest yield.

TAC tranches are relieved of prepayment risk only, so they are offered at a yield that is higher than a PAC.

PLAIN VANILLA tranches are not relieved of either extension or prepayment risk, so they yield less than a companion, but more than a PAC or TAC.

Arranging the CMO tranches from highest to lowest yield, the order is:

Companion
Plain Vanilla
Targeted Amortization Class
Planned Amortization Class

$$$

MUNI. VARIABLE RATE DEMAND NOTES issued by a municipality.
--- The interest rate is _________ to the market rate weekly; and at the reset date,
--- the holder can "put" the bonds back to the issuer ____ _____. The minimum value of the bond is par - because of the put feature.
--->>>>Because the price of the bond cannot go ________ ____, these bonds are not subject to ________ _____ and the yield cannot go above the stated rate.
--- However, if interest rates fall, the price can ____ _______ _____ (by a small amount) and the yield can fall below the stated rate until the next reset date.

Municipal variable rate demand notes are issued by a municipality.
--- The interest rate is RESET to the market rate weekly; and at the reset date,
--- the holder can "put" the bonds back to the issuer AT PAR. The minimum value of the bond is par - because of the put feature.
--->>>>Because the price of the bond cannot go BELOW PAR, these bonds are not subject to MARKET RISK and the yield cannot go above the stated rate.
--- However, if interest rates fall, the price can GO ABOVE PAR (by a small amount) and the yield can fall below the stated rate until the next reset date.

READ ALOUD

• *MBIA: Municipal Bond Insurance Association Corp.
• ***AMBAC: American Municipal Bond Assurance Corp.
• ***FGIC: Financial Guaranty Insurance Corporation
• FSA: Financial Security Assurance Corp.

WHAT ARE THESE?

"Private Company" Muni. Bond Insurers

$$$$$$$$

The "flow of funds" states the priority of collecting and disbursing pledged revenues.

The normal flow of funds (from first to last) is:
1
2
3
4
5
6
7

.

The normal flow of funds (from first to last) is:
• Revenue fund
• Operation and maintenance fund
• Sinking fund
• Debt service reserve fund
• Reserve maintenance fund
• Renewal and replacement fund
• Surplus fund

$$$$$$$

...THE COMPONENTS OF....
...OVERALL NET DEBT ARE...

Gross Direct Debt:

Sinking Fund Deposits and Self Supporting Debt:

Net Direct Debt:

Overlapping Debt:

Net Direct and Overlapping Debt:

Debt per capita:

Debt to assessed valuation:

he components of Overall Net Debt are:

GROSS DIRECT DEBT: All indebtedness of the issuer

SINKING FUND DEPOSITS AND SELF SUPPORTING DEBT:
Monies **earmarked to retire debt** held on deposit in a fund to reduce issuer's obligation,

<<< Self supporting debt (meaning debt other than G.O. bonds) is also deducted to arrive at the true amount of debt supported by taxpayers. >>>

SO ----
Gross Debt - Self supporting Debt =
Debt Supported by taxpayers

NET DIRECT DEBT: debt of the issuer that's ultimately the responsibility of the taxpayers.
<MEM>>> "taxpayers are the net"

OVERLAPPING DEBT: The issuer's share of debt of other governmental bodies which are wholly or partly within the same geographic boundaries. For example, a school district may consist of three separate towns. Debt issued in the name of the school district would be shared by the three towns. This is an "overlapping debt."

NET DIRECT AND OVERLAPPING DEBT:
The true debt liability of the issuer to be paid from taxing power.
Once Total Net Direct and Overlapping debt has been computed, ratio tests are performed to evaluate the issuer.

DEBT PER CAPITA: is the most common measure used to evaluate the relative debt burden of one municipality as compared to another.

DEBT TO ASSESSED VALUATION: is not as widely used because each municipality assesses property value based on differing methods. Because there is no consistency, this measure is not used as widely.

$$$$$

MUNI. BOND INSURERS:
<<MEMORY TIP>>
Hmmbeeeah..........
I'mBack!................
FigChic your'e a...
Facade!................


Given a choice, every municipal issuer would like to see Moody's and Standard and Poor's rate the issue AAA. The agencies perform an analysis of the bonds.
Issuers can get an ______ rating if the bonds are insured.

Municipal bond insurers are:
........................<MEM>>...
•M__________
•A__________
•F__________
•F__________

These Rated "AAA"
These are private companies (e.g. MBIA is listed on the New York Stock Exchange) that insure both the timely payment of interest and the repayment of principal on a given issue, for which a fee (similar to an insurance premium) is paid by the issuer. Due to the better credit rating, as well as the cost of the insurance, insured issues typically yield about 1/2 percent less than similar uninsured issues.

`MUNI. BOND INSURERS:

Given a choice, every municipal issuer would like to see Moody's and Standard and Poor's rate the issue AAA. The agencies perform an analysis of the bonds. Issuers can get an __AAA__ rating if the bonds are insured. Municipal bond insurers are:

•M__________Hmmbeeeah....
•A__________I'mBack!............
•F__________FigChic your'e a
•F__________Facade!.............

• *MBIA: Municipal Bond Insurance Association Corp.
• ***AMBAC: American Municipal Bond Assurance Corp.
• ***FGIC: Financial Guaranty Insurance Corporation
• FSA: Financial Security Assurance Corp.

Rated "AAA"
These are private companies (e.g. MBIA is listed on the New York Stock Exchange) that insure both the timely payment of interest and the repayment of principal on a given issue, for which a fee (similar to an insurance premium) is paid by the issuer. Due to the better credit rating, as well as the cost of the insurance, insured issues typically yield about 1/2 percent less than similar uninsured issues.

$$$$$$$

Bank Qualified Municipal Issues

Certain smaller issues of General Obligation bonds (not Revenue bonds), limited in size to a maximum of $___________ are "bank qualified" municipal bonds under the tax code.

.

Bank Qualified Municipal Issues
Certain smaller issues of General Obligation bonds (not Revenue bonds), limited in size to a maximum of $10,000,000, are "bank qualified" municipal bonds under the tax code.

$$$$$$

ETN HAS NO RELATION TO AN ETF
Do not confuse an ETN with an ETF - an

An ETF is an ______ ______ _______ where the shareholder owns a piece of the underlying portfolio.

An ETN has no underlying _________ - the issuer is promising to give a return tied to the ________, but the investments in that index may, or may not, be owned by the issuer.

The ETN is really only backed by the credit rating of the ______ ______.

ETN Has No Relation To An ETF

Do not confuse an ETN with an ETF - an
ETF = Exchange Traded Fund.

An ETF is an INVESTMENT COMPANY PRODUCT where the shareholder owns a piece of the underlying portfolio.

An ETN has no underlying PORTFOLIO - the issuer is promising to give a return tied to the INDEX, but the investments in that index may, or may not, be owned by the issuer.

The ETN is really only backed by the credit rating of the ISSUING BANK.


.

$$$$$$

Types of securities which trade flat:

D_________ bonds trade flat;

I_________ bonds trade flat since they are not currently paying interest;

Z______ C______ bonds trade flat because no periodic interest payments are made;

C________ P_______ trades flat because no interest payments are made - the paper is bought at a discount and redeemed at par.
KEY = **The increase in value is the "interest."*

Finally, if a bond trade settles on the
I____ P____ D____, no accrued interest is due since this is the exact cut-off date for the seller to receive his 6-month payment and the buyer to pick up the next 6-month period.

Types of bonds that trade flat:


DEFAULTED bonds trade flat;


INCOME BONDS trade flat since they are not currently paying interest;


ZERO COUPON bonds trade flat because no periodic interest payments are made;


COMMERCIAL PAPER trades flat because no interest payments are made - the paper is bought at a discount and redeemed at par. The increase in value is the "interest."


Finally, if a bond trade settles on the INTEREST PAYMENT DATE, no accrued interest is due since this is the exact cut-off date for the seller to receive his 6-month payment and the buyer to pick up the next 6-month period.

$$$$$

Retiring debt / Sinking fund =


Tender offer =


Refunding debt =


.

SINKING FUND
Corp. bonds redeemed ======
1. at maturity, or,
2. if a call provision is included in Indenture
3. The indenture can also call for the establishment of a "sinking fund" --
...3a--money to retire bonds at maturity
...3b--or portion each year at specified date
...3c--seen as extra protection measure
...3d--sinking fund provision allows issuer to
.......retire portions of the issue by either
.......(1) calling the bonds, or
.......(2) buying them in open market if they are lower than the call price.

TENDER OFFER - corp. makes tender offer for the outstanding bonds:
a) corp. makes offer to buy - typically at better than market price.
b) fills tenders of bonds on a first come, first served basis, until retired desired amount of debt
c) bonds tendered in excess, returned to holders

REFUNDING DEBT = Corp simply rolls debt (part or full) by issuing a refunding bond issue and using the proceeds to call or retire debt
1> when interest rates have dropped, or
2> when it simply doesn't have the funds or the desire to retire bonds


======DETAILED======
Retiring debt / Sinking fund
Corporate bonds may be redeemed at maturity, or, if a call provision is included in the Trust Indenture, may be called under the terms of the provision. In this manner, debt is retired. The indenture can also call for the establishment of a "sinking fund." Money is deposited into the fund periodically (usually annually) and the funds are used to retire the bonds at maturity or to retire a portion of the issue each year after a specified date. This is an extra protection measure for bondholders. The terms of a sinking fund provision allow the issuer to retire portions of the issue by either calling the bonds or buying them in the open market if the price is lower than the call price.

Tender offer
Another way for a corporation to retire debt is to make a tender offer for the outstanding bonds. In such a case, the corporation makes an offer to buy the bonds from any of the bondholders, typically at a better than market price. Such offers may be for part of the bonds outstanding; so not all of the bondholders who tender may actually sell their bonds back to the corporation. The issuer will fill tenders of bonds on a first come, first served basis, until the issuer has retired the desired amount of debt. Any bonds tendered in excess of the amount repurchased by the company are returned to the holders.

Refunding debt
Instead of retiring debt, a corporation may simply roll it over in part or in full. It does this by issuing a refunding bond issue and using the proceeds to call or retire debt. A corporation issues refunding bonds when interest rates have dropped (to retire expensive debt and replace it with lower interest rate debt) or when it simply doesn't have the funds or the desire to retire bonds.

All of the following corporate bonds are secured EXCEPT:

A. equipment trust certificates
B. second mortgage bonds
C. sinking fund debentures
D. collateral trust certificates


The best answer is C. A secured bondholder has a lien on a specific asset of the company - such as equipment (an equipment trust certificate), real property (a mortgage bond) or securities given as collateral (a collateral trust certificate). A debenture is a promise to pay without any liens on corporate assets.

C. sinking fund debentures
A secured bondholder has a lien on a specific asset of the company - such as equipment (an equipment trust certificate), real property (a mortgage bond) or securities given as collateral (a collateral trust certificate). A debenture is a promise to pay without any liens on corporate assets.

$$

Which of the following disclosures must be made to customers who wish to purchase long-term negotiable certificates of deposit?

I Sale prior to maturity can result in a price that is lower than the original purchase amount
II Trading in the secondary market is limited
III Step-Down CD yields may not reflect the actual market interest rate
IV Callable CDs are subject to reinvestment risk

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

ALL FOUR ARE CORRECT
Customers who wish to buy long-term negotiable certificates of deposit must be informed that sale prior to maturity can result in a loss on the security (if market interest rates have risen in the interim); that while a secondary market exists for these securities, it is limited; that CDs with Step-Up or Step-Down yields may not give an interest rate that is reflective of the market (since many issuers entice buyers with higher than market initial interest rates that then step-down over time to the current market rate); and that long term-CDs, if they are callable, subject the customer to reinvestment risk.

$$

Which of the following are considered to be creditors of a corporation?

I Common Shareholders
II Preferred Shareholders
III Convertible Bondholders
IV Non-convertible bondholders

A. I and II
B. III only
C. III and IV
D. I, II, IV

C. III and IV

III Convertible Bondholders
IV Non-convertible bondholders

Bondholders are creditors of a company. Convertible bondholders are creditors of a company as long as they keep their bonds and do not convert to common shares. Common and preferred shareholders have an equity position.

$$$$

Which CMO tranch will be offered at the highest yield?

A. Plain vanilla
B. Targeted amortization class
C. Planned amortization class
D. Companion

Arranging the CMO tranches from highest to lowest yield, the order is:

D. Companion

Companion======== HIGHEST YIELD
Plain vanilla ======= NEXT HIGHEST
TAC ============= NEXT LOWEST
PAC ============= LOWEST YIELD


"PLAN VANILLA" = (the SIMPLIST form of CMO tranch structure, a plain vanilla CMO divides the underlying mortgage cash flows sequentially into a fixed number of tranches, creating a number of EXPECTED maturities.

Companion tranches are the "shock absorber" tranches, that absorb prepayment risk out of a TAC (Targeted Amortization Class) tranch; or both prepayment risk and extension risk out of a PAC (Planned Amortization Class) tranch. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield.

$$$$
The physical securities which are the underlying collateral for Treasury Receipts are:
A. Treasury Bills
B. Treasury Notes
C. Series EE Bonds
D. Treasury Stock
______ are too short and _____ are not traded.

B. Treasury Notes
T-BILLS are too short and SERIES EE are not traded.

The physical securities which are held in trust against the issuance of Treasury Receipts are either Treasury Notes or Treasury Bonds.

T-BILLS cannot be used because their maturities are too short;
SERIES EE bonds cannot be used because they are non-marketable

.

$$$$$$$$$

When analyzing a General Obligation bond, all of the following ratios would be evaluated EXCEPT:

A. debt service coverage ratio
B. debt to assessed valuation ratio
C. debt per capita ratio
D. tax collection ratio

.

A. debt service coverage ratio
BECAUSE -- the debt service coverage ratio is used for revenue bond analysis - not G.O. bond analysis.

The debt service coverage ratio is Net Revenues From the Facility / Debt Service Requirements. G.O. bonds are paid off from tax collections. Therefore, the relevant measures for G.O. bond analysis are Debt / Assessed Valuation of Property; Debt / Population; and Taxes Collected / Taxes Assessed.

$$$

Municipal dollar bonds (quoted on a percentage of par basis) are _______ bonds. (TERM OR SERIAL)

Municipal bonds quoted in basis points (yield quotes) are ________ bonds. (TERM OR SERIAL)

Municipal dollar bonds (quoted on a percentage of par basis) are TERM bonds.

Municipal bonds quoted in basis points (yield quotes) are SERIAL bonds.

$$$$$$

The ratio of "net direct debt
plus overlapping debt
to assessed valuation"
is used to:..................

I analyze general obligation bonds

II analyze revenue bonds

III determine the municipality's ability to generate sufficient taxes to pay for debt service requirements

IV determine the municipality's ability to collect taxes assessed upon real properties in the political subdivision

A. I and III
B. I and IV
C. II and III
D. II and IV

A. I and III

I analyze general obligation bonds
III determine the municipality's ability to generate sufficient taxes to pay for debt service requirements

The ratio of net direct plus overlapping debt to assessed valuation is used to evaluate general obligation bonds (which are paid by ad valorem taxes assessed upon the real properties in the town). The assessed valuation of each property determines the taxes to be paid.
Revenue bonds are self-supporting, whereas G.O. bonds are non-self supporting. Therefore, this ratio only applies to G.O. bonds.

$$$$$$

Credit analysis of an airport authority revenue bond would include evaluation of which of the following?

I Competing facilities
II Overlapping debt
III Debt coverage ratios
IV Flow of funds

A. I only
B. II and III
C. I, III, IV
D. I, II, III, IV

C. I, III, IV

I Competing facilities
III Debt coverage ratios
IV Flow of funds

Overlapping debt is not relevant to revenue bond analysis - each revenue bond is self supporting. Overlapping debt is considered in a General Obligation bond analysis.

Credit analysis of a revenue bond issue will include the impact of competing facilities; analysis of the flow of funds (e.g. is it a gross revenue pledge or a net revenue pledge?); and computation of the coverage ratios (Funds Available for Debt Service/Annual Debt Service Requirements).

$$$$$$

{ READ CAREFULLY }

All of the following would be included in the Net Bonded Debt of a municipal issuer EXCEPT:

A. Non-self supporting general obligation bonds
B. Self supporting general obligation bonds
C. Non-self supporting revenue bonds
D. Self supporting revenue bonds

D. Self supporting revenue bonds

Net Bonded Debt of a municipal issuer includes all bonded debt except for self supporting revenue bonds.
This is the debt that must be serviced from tax collections.

Self supporting revenue bonds pay their own way and are not paid from tax collections.

Non-self supporting revenue bonds (for example, a double barreled revenue bond that is payable from revenues and taxing power if necessary) are included in Net Bonded Debt.

$$$

A customer owns a convertible subordinated debenture, convertible into common at $25 per share. The bond is currently trading at par. If the bond's market price increases by 20%, the conversion ratio will be:

A. 25:1
B. 32:1
C. 40:1
D. 48:1

C. 40:1
The conversion price (and hence the conversion ratio) is fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $25, based upon converting each bond at par. $1,000 par / $25 conversion price = 40:1 conversion ratio. Thus, for every bond that is converted, the holder receives 40 shares.
The only time the conversion price (and hence the conversion ratio) changes is if there is an "anti-dilutive" covenant in the trust indenture. In such a case, if the corporation issues more common shares (diluting the market price of the outstanding common), the conversion price is reduced as well to get the "value" of the conversion feature unchanged relative to the common's market price.

$$

Four revenue bonds have the same maturity. Which of the following will cost the greatest amount?

A. 5% bond quoted on a 5.25 basis
B. 5 1/4% bond quoted on a 5.00 basis
C. 5 1/2% bond quoted on a 5.50 basis
D. 5 1/4% bond quoted on a 5.50 basis

B. 5 1/4% bond quoted on a 5.00 basis

INSIGHT = TEETER TOTTER:
This choice is the only one where the nominal yield is higher than the basis.

To lower the effective yield (basis) on the bond, the price must rise - this is the only premium bond of the 4 choices given. The other choices are either priced at par; or at a discount.

$$$$$$$

FANNIE MAE'S stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were de-listed from the NYSE and now trade OTC in the PINK SHEETS.

Ginnie Mae obligations trade at lower yields than Fannie Mae obligations since Ginnie Maes are directly backed by the U.S. Government whereas Fannie Maes are ONLY _______ ________.

FANNIE MAE'S stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the ______ ________ PINK SHEETS.

Ginnie Mae obligations trade at lower yields than Fannie Mae obligations since Ginnie Maes are directly backed by the U.S. Government whereas Fannie Maes are ONLY IMPLICITLY BACKED.

.

$$$$$$

Municipal dollar bonds are generally:

A. term bonds
B. series bonds
C. serial bonds
D. short term maturities

A. term bonds
Municipal dollar bonds (quoted on a percentage of par basis) are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

$$$$$

Regarding the allocation of CMO cash flows, which statements are true?

I Interest received from the underlying securities is allocated pro-rata to all tranches

II Interest received from the underlying securities is allocated sequentially by tranch maturity

III Principal repayments received are allocated pro-rata to all tranches

IV Principal repayments received are allocated sequentially by tranch maturity

A. I and III
B. I and IV
C. II and III
D. II and IV

<<< MEMORY TIP >>

DUMP THE SCHOOL PRINCIPLE IN THE TRANCH!

B. I and IV

I Interest received is allocated pro-rata to all tranches

IV Principal repayments are allocated sequentially by tranch maturity

A CMO backed by 30 year mortgages might be divided into 15-30 separate tranches. 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 tranch, etc.

$$

Which are true statements regarding government agencies and their obligations?

I Fannie Mae is a publicly traded company
II Ginnie Mae obligations trade at higher yields than Fannie Mae obligations
III Agency obligations have the direct backing of the U.S. Government
IV Ginnie Mae securities are listed and trade

A. I only
B. I and II only
C. II and IV only
D. I, III, IV

A. I only
I Fannie Mae is a publicly traded company

FANNIE MAE'S stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the PINK SHEETS.

Ginnie Mae obligations trade at lower yields than Fannie Mae obligations since Ginnie Maes are directly backed by the U.S. Government whereas Fannie Maes are ONLY IMPLICITLY BACKED.

Ginnie Mae has not been "spun off" by the government as a private company and cannot be spun off because of the guarantee of the U.S. Government that its securities carry.

Fannie Mae was "spun off" by the government as a public company listed on the NYSE (so was Freddie Mac).

$$$$$$$

When monies are deposited into a sinking fund to retire municipal debt under mandatory call provisions found in the bond contract, the issuer:

I Calls bonds by random selection at preset dates and at preset prices

II Tenders for the bonds at preset dates and at preset prices

III Is permitted to retire outstanding bonds by making purchases of that issue in the open market

IV Is prohibited from retiring outstanding bonds by making purchases of that issue in the open market

A. I and III
B. I and IV
C. II and III
D. II and IV

<<< 2 MEMORY TIPS >>>
1. SINKING FUND -- PETER "CALLED" OUT !!!
2. VARIABLE DEMAND NOTE -- BE "VARY" TENDER WITH A VARIABLE DEMAND NOTE


A. I and III
I Calls bonds by random selection at preset dates and at preset prices

III Is permitted to retire outstanding bonds by making purchases of that issue in the open market

When monies are deposited into a sinking fund to retire debt, the issuer has the choice of either calling in bonds at preset dates or buying the bonds in the open market. (The issuer will do whatever is cheaper). The specific bonds to be called are chosen by random lot.

$$

The money market instrument with the shortest maturity is:

A. Federal Funds
B. Eurodollar Certificates of Deposit
C. Commercial Paper
D. Treasury Bills

A. Federal Funds
Federal Funds are overnight loans of reserves from bank to bank. This is the shortest maturity for a debt obligation.

$$$$

An analysis of yield curves of US Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. Based upon investor expectations as evidenced by the widening of the yield spread, an appropriate investment is (SELECT ONE ANSWER) :

A. U.S. Government bonds
B. Medium quality corporate bonds
C. Long term discount bonds
D. Long term premium bonds

.

A. U.S. Government bonds
If the yield "spread" between Government bonds and lower medium quality corporate bonds is widening, this means that yields on lower grade corporate bonds are higher than normal relative to yields on Government bonds. This occurs because an excess of investors are buying Governments, pushing their yields down; or an excess of investors are selling lower grade corporate bonds, pushing their yields up. This behavior is typical when investors expect a recession. When a recession is expected, there is a "flight to quality". Investors liquidate holdings that are vulnerable in a recession (low grade corporate bonds) and put the money into safe havens such as government bonds.

$$

Regular way trades of U.S. Government bonds settle: (select two)

I through a National Securities Clearing Corporation
II through the Federal Reserve System
III on the same day as trade date
IV on the business day after trade date

A. I and III
B. I and IV
C. II and III
D. II and IV

D. II and IV
Regular way trades of U.S. Government bonds settle through the Federal Reserve System in Fed Funds. Settlement of government securities trades takes place the business day following trade date. "Non-eligible" securities settle through national clearing houses, such as the NSCC - National Securities Clearing Corp., of which broker/dealers are members. These trades settle in 3 business days in clearing house funds.

$$$$$$$

Treasury Receipts pay interest:

A. quarterly
B. semi annually
C. annually
D. at maturity

D. at maturity
Essentially, Treasury Receipts are "zero coupon" Treasury bonds or Treasury notes that pay interest earned at maturity.

$

Which statement best describes a bond which is trading "flat"?

The bond is trading:

A. at par
B. with accrued interest
C. without accrued interest
D. at a fixed dollar price

C. without accrued interest
A bond trades flat (without accrued interest) when the issuer has defaulted on the interest payments, or if the issue is an income bond or a zero coupon bond. Therefore, a current bondholder receives no interest on bonds that trade flat. When such a bond is traded, no accrued interest is paid from buyer to seller.

$$$

A bank wishes to make an investment in municipal bonds. The most advantageous security for this investor is a:

A. banker's acceptance
B. bank qualified municipal bond
C. BAN
D. bearer bond

B. bank qualified municipal bond

BANK QUALIFIED MUNICIPAL BONDS - are small dollar issues (less than $10,000,000) of General Obligation bonds. If a bank invests in these bonds, it is given a substantial tax break - 80% of the interest cost of carrying bank deposits that funded the purchase of those bonds is tax deductible to the bank. This benefit is only available on bank qualified issues. It does not apply to bankers' acceptances (a type of money market instrument); Bond Anticipation Notes; or bearer bonds.

$$$$

When comparing a PAC tranch to a TAC tranch: (select two)

I TAC tranches have a the same level of prepayment risk
II TAC tranches have the same level of extension risk
III TAC tranches have a higher level of prepayment risk
IV TAC tranches have a higher level of extension risk

A. I and II
B. III and IV
C. I and IV
D. II and III

<< MEM TIP - "You can TAC on payment but you cannot TAC on extension of time." >>

C. I and IV

I TAC tranches have a the same level of prepayment risk
IV TAC tranches have a higher level of extension risk

Companion classes are "split off" from the Planned Amortization Class (PAC) and act as buffers absorbing prepayment and extension risk prior to this risk being applied to the PAC tranch. The PAC, which is relieved of these risks, is given the most certain repayment date. The Companion, which absorbs these risks first, has the least certain repayment date. A Targeted Amortization Class (TAC) is like a PAC, but is only buffered for prepayment risk by the Companion; it is not buffered for extension risk. Thus, A TAC has the same level of prepayment risk as the PAC; but the TAC has a higher level of extension risk than the PAC.

$$$$$

The flow of funds stated in the trust indenture has payments being made to a sinking fund after the operations and maintenance fund is paid. The sinking fund is where:

A. monies to meet debt service requirements are deposited
B. monies to pay extraordinary maintenance or replacement costs are deposited
C. monies to pay for regularly scheduled repairs and replacements are deposited
D. monies "left-over" after all other uses are exhausted are deposited

.

A. monies to meet debt service requirements are deposited

The sinking fund is where monies to meet debt service requirements are deposited. Choice B is the Reserve Maintenance Fund; Choice C is the Renewal and Replacement Fund; and Choice D is the Surplus Fund.

$$$$$$

1. SERIES EE BONDS ARE non-negotiable U.S. Government savings bonds that are purchased at ___ percent of face value and which mature __ _____ _____.

2. The purchaser receives ___ _______ until the bonds are redeemed.

3. Taxes are paid at ________.

4. Series EE bonds come in denominations of $___ to $______.

5. These are _______ securities that __ ____ ______.

1. Series EE bonds are non-negotiable U.S. Government savings bonds that are purchased at ___50___ percent of face value and which mature AT FACE VALUE.

2. The purchaser receives NO INTEREST until the bonds are redeemed.

3. Taxes are paid at REDEMPTION

4. Series EE bonds come in denominations of _$50__ to __$10,000___

5. These are REDEEMABLE securities that DO NOT TRADE.

$$$$$$

ADRs
1. These are negotiable securities representing ownership of the common or preferred stock of a ______ ______ that is being held in trust.

2. The securities are deposited in a __________ ________ of an American bank.

3. Receipts (ADRs) are issued against this deposit which entitle the ADR holder to receive all the ________ and to participate in the ________ appreciation of the foreign company's securities.

4. The number of ADRs issued against the _______ __ ________ may or may not be on a one-for-one basis.

5. ADRs are perhaps the easiest and most popular way for Americans to invest in the securities of ________ ________.

6. Another name for these securities is _______ ______ ______- (ADSs).

ADRs
1. These are negotiable securities representing ownership of the common or preferred stock of a FOREIGN COMPANY that is being held in trust.

2. The securities are deposited in a FOREIGN BRANCH of an American bank.

3. Receipts (ADRs) are issued against this deposit which entitle the ADR holder to receive all the DIVIDENDS and to participate in the CAPITAL appreciation of the foreign company's securities.

4. The number of ADRs issued against the SHARES ON DEPOSIT may or may not be on a one-for-one basis.

5. ADRs are perhaps the easiest and most popular way for Americans to invest in the securities of FOREIGN COMPANIES.

6. Another name for these securities is AMERICAN DEPOSITORY SHARES (ADSs).

$$$$


CREDIT RISK =

MARKET RISK =

PURCHASING POWER RISK =

MARKETABILITY RISK =

LIQUIDITY RISK =

REINVESTMENT RISK =


__________ ________ BONDS avoid reinvestment risk..

CREDIT RISK = The risk that the ISSUER cannot make interest and principal payments

MARKET RISK = INTEREST RATE RISK

PURCHASING POWER RISK = INFLATION RISK

MARKETABILITY RISK = The risk that the security will be DIFFICULT TO SELL.

LIQUIDITY RISK = risk security only sold by incurring LARGE TRANSACTION COSTS

REINVESTMENT RISK = risk for a long-term bond investor that MARKET INTEREST rates are falling over that investment's time horizon.

ZERO COUPON BONDS AVOID REINVESTMENT RISK

$$$$$

BAs = _________ __________

This is a _______ _______ instrument that is a time draft used to finance _______ _______.

A bank issues a draft payable at _______ amount to the seller of the goods at a _______ date (typically ___ to ___ days in the future; the time that it takes to _____ the goods to their destination).

This draft can be traded at a _______ to the face amount.

The difference between the face amount and the amount charged by the person selling is the _______ _______ to be paid at maturity.

The difference between the _______ _______ and the _______ _______ is the interest on the banker's acceptance.

BAs = BANKERS ACCEPTANCE

This is a MONEY MARKET instrument that is a time draft used to finance INTERNATIONAL TRADE .

A bank issues a draft payable at FACE amount to the seller of the goods at a FUTURE date (typically 30 TO 90 days in the future; the time that it takes to SHIP the goods to their destination).

This draft can be traded at a DISCOUNT to the face amount.

The difference between the face amount and the amount charged by the person selling is the INTEREST RATE to be paid at maturity.

The difference between the DISCOUNT PRICE and the FACE VALUE is the interest on the banker's acceptance.

$$$

SIMPLY READ THROUGH THIS AND KNOW ONLY FOR "AWARENESS" KNOWLEDGE:


""" BANK QUALIFIED MUNICIPAL BONDS """

BANK QUALIFIED MUNICIPAL BONDS - are small dollar issues (less than $10,000,000) of G______ O_____ bonds.

If a bank invests in these bonds, it is given a substantial tax break - ____% of the interest cost of carrying bank deposits that funded the purchase of those bonds is t___ d________ to the bank. This benefit is only available on bank qualified issues.

It does not apply to:
Bankers' Acceptances (a market instrument)
Bond Anticipation Notes
or Bearer Bonds

BANK QUALIFIED MUNICIPAL BONDS - are small dollar issues (less than $10,000,000) of GENERAL OBLIGATION bonds.

If a bank invests in these bonds, it is given a substantial tax break - 80% of the interest cost of carrying bank deposits that funded the purchase of those bonds is TAX DEDUCTIBLE to the bank. This benefit is only available on bank qualified issues.

It does not apply to:
Bankers' Acceptances (a type of money market instrument)
Bond Anticipation Notes
or Bearer Bonds

$$$$$$$

...THE COMPONENTS OF....
...OVERALL NET DEBT ARE...

Gross Direct Debt:

Sinking Fund Deposits and Self Supporting Debt:

Net Direct Debt:

Overlapping Debt:

Net Direct and Overlapping Debt:

Debt per capita:

Debt to assessed valuation:

Gross Direct Debt: ALL THE DEBT

Sinking Fund Deposits and Self Supporting Debt: MONEY HELD TO REDEUCE OR RETIRE THE DEBT

Net Direct Debt: DEBT OWED BY TAXPAYERS

Overlapping Debt: SHARED GEOGRAPHIC BOUNDARIES DEBT

Net Direct and Overlapping Debt: THE TRUE TOTAL DEBT OWED BY THE TAXPAYERS

Debt per capita: DEBT COMPARING ONE MUNICIPALITY TO ANOTHER

Debt to assessed valuation: DEBT COMPARED TO VALUE

The physical securities which are held in trust against the issuance of TREASURY RECEIPTS are either Treasury ________ or Treasury ________.

T-BILLS cannot be used because their maturities are ______ ______;

SERIES EE bonds cannot be used because they are ____-________.

The physical securities which are held in trust against the issuance of Treasury RECEIPTS are either Treasury NOTES or Treasury BONDS.

T-BILLS cannot be used because their maturities are TOO SHORT;

SERIES EE bonds cannot be used because they are NON-MARKETABLE.

$$$

______________ tranches absorb the prepayment risk and extension risk out of a PAC tranch and are offered at the highest yield.

__ __ __ tranches, because they are relieved of both extension and prepayment risk, are offered at the lowest yield.

__ __ __ tranches are relieved of prepayment risk only, so they are offered at a yield that is higher than a PAC.

________ ________ tranches are not relieved of either extension or prepayment risk, so they yield less than a companion, but more than a PAC or TAC.

Arranging the CMO tranches from highest to lowest yield, the order is:

COMPANION tranches absorb the prepayment risk and extension risk out of a PAC tranch and are offered at the highest yield.

PAC tranches, because they are relieved of both extension and prepayment risk, are offered at the lowest yield.

TAC tranches are relieved of prepayment risk only, so they are offered at a yield that is higher than a PAC.
<< MEM TIP - "You can TAC on payment but you cannot TAC on extension of time." >>

PLAIN VANILLA tranches are not relieved of either extension or prepayment risk, so they yield less than a companion, but more than a PAC or TAC.

Arranging the CMO tranches from highest to lowest yield, the order is:

Companion
Plain Vanilla
Targeted Amortization Class
Planned Amortization Class

$$$$$$$$

When analyzing a General Obligation bond,
all of the following ratios would be evaluated EXCEPT:

A. debt service coverage ratio
B. debt to assessed valuation ratio
C. debt per capita ratio
D. tax collection ratio

.

A. debt service coverage ratio

Only a REVENUE BOND needs this evaluation.

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