FIL 241 sherill exam 2 participation questions & answers 2022

FIL 241 sherill exam 2 participation questions & answers 2022How often are bond coupons paid? Every six months How does a Treasury Note differ from a Treasury Bill? T-Bills mature in a year or less while T-Notes are issued with maturities over a year and up to 10 years. T-Bills don’t pay periodic interest while T-Notes do. 00:02 01:23 What type of risks do Treasury Notes and Bonds have? Interest rate risk and inflation risk Describe how STRIPS work and how the risk of STIPS compare to other coupon paying Treasuries takes all the coupon payments and face value and breaks each into individual zero coupon bond There is increased price risk but no reinvestment rate risk as you have no periodic payments Give an example of an investment strategy using STIPS. Saving for college tuition payments for a child What makes TIPS different from other Treasuries? they include inflation adjustment Explain how a Treasury auction works. Treasury allow for larger quantities and a max price to be paid for the bid. put smaller quantities at a price set in the auction. The Treasury takes all noncompetitive bids and accepts starts taking competitive bids at the highest price/lowest yields until all Treasuries are auctioned off. The yield on the lowest accepted bid is the stop-out yield and all accepted bids receive this. give an example of what money from a municipal bond might be used for. Building an airport, toll bridge, school, government building, or many other projects. What is special about municipal bonds from a tax perspective? Their coupon interest is federally tax-exempt and may be tax-exempt at the state level if purchased from an issuer in the same state the person resides. Assuming the same issuer has a very good credit rating and issues both a general obligation municipal bond as well as a revenue municipal bond. Which of these two is generally less risky (has lower default risk)? general obligation bond Give an example of risks/troubles in the municipal bond market? There are concerns with the financial solvency of some governments that could lead to defaults on bonds. Examples of these issues include Puerto Rico, Detroit, and Jefferson County (AL). Why is a bond indenture important? It details the most important aspects of the bond including the rights and obligations of the issuer and bond holders. It lets bond holders know the important characteristics or the bond and the issuer. It lays out the basic agreement the two parties enter into. 00:01 01:23 Suppose you want to purchase a corporate bond from Home Depot. You expect the company’s stock will increase a large amount in the future. Which type of bond would you most likely prefer? Convertible bond What is one of the primary motivations for companies to issue convertible bonds in the short term It is cheaper to raise money and makes it more attractive for investors. When is a callable bond most likely to be called? When interest rates have declined since the bond’s issuance Where is there more secondary market trading of corporate bonds? Over-the-counter market Compare the risk of a bond with a credit rating of A versus BB+. An "A" rated bon is considered investment grade while a BB+ is considered non-investment grade. The BB+ bond has considerable more default risk than the A rated bond. What are primary factors that impact investors to invest in international bonds? They have the potential to earn higher returns and improve portfolio diversification For each pair, identify which of bond feature would be associated with a lower bond yield a. Taxable bond OR Tax-exempt bond b. Low default risk bond OR High default risk bond c. Callable bond OR Non-callable bond d. Convertible bond OR Non-convertible bond e. Liquid bond OR Non-liquid bond a. tax exempt bond b. low default risk bond c. noncallable bond d. convertible bond e. liquid bond What are primary risks/concerns for investors in international bonds? risks such as political risk and greater potential for capital flight in less developed markets. lower recourse in the event of non-payment. There are also foreign exchange rate movements that can dramatically impact returns. A Japanese company issues bonds denominated in US dollars that are sold in China. What are these bonds called? A. Samurai Bonds B. Yankee Bonds C. Eurobonds D. Foreign Bonds C. Eurobonds What are the two most common currency that international bonds are denominated in? euros and US dollars Approximately, what is the dollar amount of mortgage loans outstanding? $13.85 trillion as of 2016 What is a standard down payment on a house as a percent of the home value 20% What do homeowners typically have to purchase is the loan-to-value ratio is more than 80% Private mortgage insurance (PMI) Assuming the same borrower and loan amount, select either a 15 or 30 year mortgage for each a. Which has a lower interest rate? 15 year OR 30 year b. Which has a lower monthly mortgage payment? 15 year OR 30 year c. Which will lead to higher cumulative interest payments over the life of the mortgage? 15 year OR 30 year a. 15 year b. 30 year c. 30 year How does a balloon payment mortgage differ compared to an amortized mortgage? A balloon payment mortgage only pays interest initially and then all principle is due after a period of time such as 3 or 5 years. An amortized mortgage has the same payment each period and includes both principal and interest. Explain what is meant by a 3/1 ARM. An adjustable rate mortgage with fixed rate for the first three years that adjust thereafter once per year. What will happen to a person with an ARM if interest rates increase (assuming it is past the initial fixed rate period)? Their monthly payment will increase depending on how much higher the interest rate is 1Why would someone pay discount points? If someone gets a $300,000 mortgage and pays 1 point, how much would that be? It is paying a fee upfront in return for a lower interest rate in the future 1 point would cost $3,000 (or 1% of the mortgage amount) What are the differences between a conventional and subprime mortgage? Subprime mortgage are riskier loans as the creditors have weaker credit histories/scores and/or lower ability to repay the loan This comes with higher default rates than conventional mortgages that are made to people with higher credit scores How does a reverse-annuity mortgage work? Homeowners uses the equity built up in the house to get monthly payments from a financial institution. In exchange, the financial institution gains ownership of the home upon the homeowners’ death. Compare the differences and similarities between the 3 types of MBS mentioned in class. Pass-through securities "pass through" promised principal and interest payment to investors, often with creation by Ginnie Mae, Fannie Mae, or Freddie Mac. With CMOs, investors are split up into different groups, or traunches, of priority for who get paid off first. Each traunch has different risks and promised payoffs. MBB is a bond using mortgages as collateral. financial institution remains the owner of the mortgage and keeps them on the books. How does Fannie Mae make money? What role do they play in the mortgage market? They buy mortgages and use them to create MBS securities and add in guarantees on payments. In return they earn a fee for this. How does Ginnie Mae work differently than Fannie Mae? Ginnie Mae is wholly owned by the US Federal Government. They focus on a specific group of loans backed by other agencies like FHA and VA. Fannie Mae is involved in a much broader group of mortgages and is a Government Sponsored Entity with private shareholders. Why do some want to shrink Fannie and Freddie? They think the government is too involved in the mortgage market and think the private sector should support this role. Why do others think we should keep Fannie and Freddie as is? They argue that Fannie and Freddie are important in keeping mortgages affordable and that the government has a responsible to keep housing affordable.