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30 Cards in this Set
- Front
- Back
What is the difference between non-marketable/non-negotiable securities and marketable securities?
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Marketable securities can be resold after they are issued while non-negotiable secrities like savings bonds cannot be resold
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T-Notes and T-Bonds
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Book-Entry interest-bearing securities that have all the attributes of traditional fixed income investments. T-Notes range from two to ten years while T-Bonds have maturities of more than 10 years
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Treasury Inflation-Protected Securities
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TIPS are interest bearing, marketable securities where interest is paid based on the consumer price index. During a period of inflation the principal value will rise. TIPS are available in 5, 10 and 30 year increments
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How are treasury bills different than T-Notes and T-Bonds?
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They are non-interest-bearing securities adn they are quoted on a discounted yield basis, since the yield represents the percentage discount from the face value, not par.
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Why is the Bid price higher than the Ask price for T-Bills?
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This is because the ask price is set against the face value of the bond, not par so the Ask Yld value reflects the typical yield
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Treasury STRIPS
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These are treasury bills that have had the interest stripped so they sell as zero-coupon bonds
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Cash Management Bills (CMBs)
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Unscheduled, short-term debt offerings that are used to smooth out Treasury cash flow and can mature in as quick as one day |
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Federal Reserve Auctions
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These are how the treasury sells securities. Securities firms will compete against each other with competitive tenders (where price and yield are specified), while individuals can file noncompetitive tenders (just take the price/yield as determined by auction.
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Series EE Bonds
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30-year investments that are purchased at a 50% discount from face value. EE bonds issued after May 1, 2005 have a rate of interest reset twice per year |
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Series I Bonds
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30 year US Savings Bonds that are indexed for inflation. They are sold at face value, unlike Series EE bonds
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Federal Farm Credit Banks and Federal Home Loan Banks
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The first helps make agricultural loans to farmers and the second provides liquidity for savings/loan institutions to meet seasonal demand for money. Both these are subject to federal tax but not state/local tax
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Student Loan Marketing Association (Sallie Mae)
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Provides liquidity to student loan makers, is subject to federal tax but state/local taxation is determined by state
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Pass Through Certificates
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A pool of mortgages with similar interest rates/maturities is sold to investors as pass-through certificates. Owners can share in the cashflow generated by the pooled mortages. they are fully negotiable
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Federal Home Loan Mortgage Corporation (Freddie Mac)
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Provides liquidity to federally insured savings institutions to finance new housing. Interest on Freddie Mac securities is fully taxable
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Government National Mortgage Association (Ginnie Mae)
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Provides financing for residential housing, interest is subject to all taxation. Modified pass-through certificates are its most popular securities |
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Prepayment Risk
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If interest rates go down and people refinance their mortgages a pass through certificate could be cashed out during a period of low interest
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Prepayment Rate and Average Life
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The prepayment rate measures the speed at which mortgages in a pool are being paid off and average life measures the average number of years each dollar of principal is expected to remain outstanding
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Collateralized Mortgage Obligations (CMOs)
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A mortgage backed security which separates principal/interest payments into tranches that each have a different rate of interest, repayment and priority level. This spreads the risk among the tranches. CMOs fall under the Act of 1933 andthe Trust Indenture Act of 1939
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The Public Securites Association (PSA) Model |
PSA assigns a number to each CMO: Equal to 100 - prepayment speed will remain stable Greater than 100 - prepayment speed is fast Less than 100 - prepayment speed will be slow |
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Plain Vanilla or Sequential Pay of CMO's
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Simplest form of paying off tranches. All tranches receive interest but tranche A only gets principal paid to it, when it closes tranche B receives principal, etc.
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Planned Amortization Class (PAC)
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Designed for risk-averse investors, sets a predetermined schedule fo principal repayments based on speeds staying within a certain range. PAC tranche has top priority and any excess payments go to a support tranche
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Targeted Amortization Class (TAC)
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Similar to a PAC but it only provides protection from contraction risk (a shorter maturity schedule). The degree of protection depends on if the CMO has a PAC with higher priority
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Companion Bond
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Absorb prepayments from PAC or TAC tranches. They have greater volatility of cash flow and hihg variability of average life so they have higher yields
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Z-Tranche
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During the initial phase of a z-tranche's life they provide no cash flow. After all the other tranches have been retired interest and principal payments willbe made to it
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Principal Only and Interest Only Securities |
Principal only mortgage bonds have interest stripped from them while Interest only have little or no principal. IO's increase in value when prepayments are slow since there is more time for interest
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Floating Rate Tranches
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These tranches offer interest rates that fluctutate with an interest-rate index, like LIBOR. The rate is set to a max (cap) and min (floor) rate. If the interest rate is adjusted by more than the change in index it is a super-floater, if it moves in the opposite direction of the index it is an inverse floater
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Disclosure Standards for CMOs
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All retail communications must include the CMO term within the name of the product and needs to be mentioned that yield and average life fluctuate. Extensive warnings and education must go to the investor. A principal must approve communications before initial use and file it with FINRA within 10 days
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Private Label CMOs versus Goverment CMOs |
Private Label CMOs have: a higher degree of risk Typically do not carry a AAA rating An independent agency will provide a different rating based on structure, issuer, collateral |
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Collateralized Debt Obligations (CDOs)
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Similar to CMOs, except it is backed (collateralized) by bonds, loans, other assets. Retail investors typically do not invest since it is too complex
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US Government and Agency Debt Securities that are state/local taxable |
GNMA, FNMA, FHLMC, SLMA (varies), CMOs, CDOs
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