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SIE Chapter 5
Term | Definition |
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Ad Valorem tax | tax imposed on the value of property |
Book entry | method of recording stock ownership electronically rather than issuing physical stock certificates |
Callable Bond | a bond that can be redeemed or paid off by the issuer prior to its maturity date |
CMO (Collateralized Mortgage Obligation) | a type of mortgage backed security that contains a pool of mortgages bundled together |
Covenant | an agreement or a guarantee |
Derivative securities | securities that derive their value from an underlying security and include options, futures contracts, and forward contracts |
Indenture | a formal legal agreement, contract or document |
investment-grade bonds | securities that have a relatively low risk of default |
nominal yield | the rate or coupon stated on the face of the bond certificate |
par value | the face value of a bond ($1000) or preferred stock ($100) |
Bond | a loan to a corporation, government agency or other organization for the purpose of financing a variety of projects |
term to maturity | the number of years during which the borrower has promised to meet the conditions of the debt |
Short term | bonds paid in less than 2 years. They offer greater price stability and generally have lower interest rates. |
intermediate | bonds paid in 2 to 10 years |
long term bonds | bonds paid over more than 10 years. they are associated with greater risk. |
term bond | a bond issue consisting of a number of bonds that are issued by the same borrower and mature on the same date |
serial bonds | have varying maturity dates spread out over a number of years. |
current income | derived from the steady stream of semiannual income, also known as the coupon, paid by the issuer of the bond during the life of the bond |
capital gains | earned when a bond matures or is sold at a price above the amount that the bondholder originally paid. |
Coupon | the annual interest payment made by bond issuers to bond owners during the life of the bond. it is generally paid semi annually |
discount bond | a bond that is sold at less than par value |
premium bond | a bond selling above its par value |
nominal yield | The coupon rate of a bond. It is also known as the stated rate. It is the rate at which the issuing corporation has contracted to pay interest during the life of the bond. The rate never changes. |
current yield | calculated by dividing the annual interest by the current market value of the security rather than the face amount (or par value) of the bond. It represents the return on investment by relating the annual coupon rate to the current price of the bond. |
Yield to Maturity (YTM) | is the total return that would be realized on a bond or other fixed income security of the bond were held until the maturity date. It is expressed as a percentage |
Yield to Call (YTC) | evaluates the performance of a callable bond from purchase to the call date. The bond is trading at a premium |
accrued interest | interest that is earned but not yet paid |
settlement date | the date in which purchased securities must be paid for or securities sold must be delivered. |
call features | give corporations the flexibility to retire debt prior to maturity |
call provision | specifies the call date and call price of a bond |
refunding | when the issuer call in an old bond by issuing a new one. |
call premium | the price above the par value of a bond that the issuer must pay the bondholders when the issuer calls, or redeems, the bond early. |
convertible bond | can be converted into the common stock of the issuer at the bondholder's discretion |
conversion ratio | the number of shares that will be received for each share of preferred stock or corporate bond |
conversion price | the price that would be feasible for the preferred shareholder or bondholder to convert to common stock |
competitive bid | bonds are advertised for sale with a notice of sale, which includes the terms of the sale and the terms of the bond issue. |
negotiated sale | an underwriter is selected by the issuer to purchase the bonds. The terms are tailored to match the needs of the ultimate investor with those of the issuer. |
bond ratings | reflect the issuer's ability to meet interest or principal payments on its bonds. |
Auction Rate Securities (ARSs) | A long term bond with an interest rate that regularly resets through a Dutch auction- starts with a high price that is reduced until a buyer consents. They are issued by municipalities, corporations, and certain government agencies. |
Treasuries | U.S. government securities. They are safe and highly liquid |
Nonmarketable securities | do not trade in the secondary market and may only be redeemed by the issuer. These include stable, low-risk savings bonds, known as series bonds, and include series EE and series I. |
Marketable securities | can be traded for value in the secondary market. These include treasury bills, notes and bonds. |
Treasury Bills (T-bills) | are original issue discount instruments (OIDs). They have maturities of 1 year or less. They are purchased at a discount from par and mature at par. They are issued in book entry form |
discount yield basis | the yield denotes the percentage discount from the face value of the issue, how T-bills are quoted. |
Treasury notes (T-Notes) | have maturities of 2 to 10 years. They have stated or fixed interest rates any pay semiannual interest |
Treasury Bonds (T-bonds) | have maturities greater than 10 years and pay a fixed interest rate. They are issued in book-entry form and are issued at $1000 par value. They pay semiannual interest. |
Treasury Inflation-Protected Securities (TIPS) | a form of U.S. Treasury bond to help investors protect against inflation. The principal is adjusted for inflation with the Consumer Price Index. The interest rate is constant, and the principal fluctuates. They are issued in 5, 10, and 30 year securities. |
Separate Trading of Registered Interest and Principal of Securities (STRIPS) | zero-coupon bonds issued directly by the U.S. Treasury at a steep discount. They gain in value every year. |
Treasury receipts (TRs) | zero coupons that are issued by broker/dealers. it is an escrow receipt backed by escrowed U.S. Treasury Securities. They are sold at a steep discount and mature at face amount. They are not backed by the full faith and credit of the U.S. Government. |
Government National Mortgage Association (GNMA) | a government owned corporation within the Dept. of Housing and Urban development. It is the only agency that is government guaranteed |
Government Sponsored Enterprises (GSEs) | include the Federal National Mortgage Association (FNMA). the Federal Home Loan Mortgage Corporation (FHLMC), which are chartered by Congress but owned by stockholders. |
Federal Home Loan Bank System (FHLBank System) | created as a GSE to support mortgage lending and related community investment on the part of its members, which include commercial banks, credit unions, thrift institutions, insurance companies and certified community development institutions. |
Secured bonds | the issuer of the bonds has transferred title to specific assets to the custody of the trustee |
mortgage bonds | the most common type of secured bonds. They are collateralized by a lien or mortgage against real property. |
Equipment Trust Certificates | usually issued by railroads and airlines, and are secured by railroad cars and airplanes. They have proven to be secure investments because the bonds are retired at a faster rate than the equipment depreciated. |
Unsecured bonds | also known as debentures. are the most common type of unsecured debt and are backed only by the full faith and credit of the issuer. There is no specific collateral backing. They pay a higher coupon rate. |
subordinated debentures | junior in claim to all other bonds. they have a lower lien priority than all other bonds, and are the riskiest bond on a corporation's balance sheet. |
Electronic Municipal Market Access (EMMA) | provides investors access to official statements and trade prices |
municipal underwriting | involves broker/dealers acting as underwriters, but may also involve banker/dealers acting as advisers to the issuer and being paid in fees. |
competitive bid | the adviser becomes the underwriter and must disclose to any any investor the involvement as both adviser to the issuer and now as underwriter |
Negotiated sale | The adviser who is participating in the underwriting must terminate as adviser in writing, disclose the total compensation as both adviser and as underwriter, and state in writing to the issuer that there is a strong potential conflict on interest |
Official Statement | disclosure document used for new issues of municipal securities. It is the equivalent of the prospectus. It is usually prepared by the issuer with help from the underwriter. |
Municipal Securities Rulemaking Board (MSRB) | governs whether a broker/dealer can sell a new issue. |
CUSIP (Committee on Uniform Securities Identification Procedures) number | Obtained by underwriter for new issues of municipal bonds. |
Bid wanted or offer wanted | used for information purposes only. It is not binding. |
Working indication | used by a dealer needs to value a bond in its inventory, or if the dealer needs an estimated market price to consider a trade. |
firm/bona fide quote | actual price at which the municipal dealer is willing to buy or sell the securities at the stated price and in the amount specified. |
Best execution | Requires broker/dealers and municipal securities dealers to use reasonable diligence to determine the best market for a particular municipal security, and then buy or sell in that market |
Disclosures | at or prior to the time of a securities trade, broker/dealers and municipal securities dealers must provide written or oral disclosure to the customer with regard to all material information known about the security. |
Short-Term Obligation Rate Transparency (Short) System | provides industry professionals and public investors with last trade information about instruments with short-term rates. |
Records required to be kept permanently by MSRB | Stock certificates Partnership papers Articles of incorporation Minutes of meetings |
Tax equivalent yield | the interest rate that must be offered by a taxable bond in order to be equal to the rate that is offered by a municipal bond |
Private Activity Bonds (PAB) | Tax-exempt municipal bonds issued by a local government entity seeking to raise money for a private company. |
Internal Revenue Bonds (IRBs) | type of private activity bond issued by a municipal government entity to build structures like sports stadiums and parking lots, which will be leased or purchased by a private corporation. They are not typically exempt for taxation at the federal level. |
General Obligation Bonds (GO bonds) | bonds issued by a state or local government that are payable from general funds of the issuer. The issuer can make interest and principal payments using any source of revenue available to them. They are backed by full faith and credit. Need voter approval |
Revenue Bonds | self-supporting bonds that are backed by used fees, revenues, or special assessments that are collected from the facility or project. |
Moral obligation bonds | Revenue bonds that allow the state legislative authority to appropriate money to pay off the bond issue if there is any deficiency in debt service, it is not a legal obligation. |
Asset-backed securities (ABS) | bonds or notes that are backed or securitized by a pool of receivables, such as auto loans/leases, credit card receivables, and home equity loans. They are traded based on the average life of all the receivables. |
Municipal notes | short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues. Maturity is one year or less. |
Tax anticipation notes (TANs) | issued in anticipation of a future tax collection |
Revenue anticipation notes (RANs) | issued in anticipation of facility revenues |
Bond anticipation Notes (BANs) | issued in anticipation of issuing a bond in the future |
Variable rate demand notes (VRDNs) | variable rate securities issued by municipalities. They are long term (20-30 years) municipal bonds with a variable interest rate that adjusts to changes in the money market interest rate, usually every 1 to 7 days. |
Money Market Debt | short term (1 year max maturity) high-quality debt, such as commercial paper, banker's acceptances, negotiable or jumbo certificates of deposit (CDs) and repurchase and revers repurchase agreements. |
commercial paper | unsecured corporate notes issued by blue chip companies to meet short term liquidity needs. |
bannkers' acceptances | short term fixed rate loans used to finance trade related transactions. Created by nonfinancial firms and the payment is guaranteed by the endorsing bank. Commonly used in international transactions. |
Negotiable certificates of deposit (CDs) | certificates of deposit with a minimum face value of $100,000. Issues and guaranteed by banks. The secondary market for negotiable CDs is highly liquid. |
Repurchase agreements (repos) | collateralized paper issued to buy and resell securities, typically overnight, for the purpose of providing short term funds. The seller makes a commitment to buy a security back from the purchaser at a specified price at a fixed time in the future. |
Reverse repurchase agreements (reverse repos) | the same as repos, except they represent the other side of the transaction. The buyer makes a commitment to sell the purchased security back to the seller at a set time and price. |
Fixed rate capital security | a type of hybrid security that combines features of both corporate bonds and preferred stock. They have a fixed coupon that is paid on a regular basis and is tax deductible for the issuer. They are fairly liquid. |
Double barreled bond | a general obligation bond backed by both revenue collections and taxes |