Asset classes and financial instruments - The bond market

11 important questions on Asset classes and financial instruments - The bond market

What are treasury notes and bonds?

T-notes are issued with maturities ranging up to 10 years, while bonds are issued with maturities ranging from 10 to 30 years.

What are inflation protected treasury bonds?

Around the world, governments of many countries, including the United States, have issued bonds that are linked to an index of the cost of living in order to provide their citi- zens with an effective way to hedge inflation risk. 

What is federal agency debt?

Some government agencies issue their own securities to finance their activities. These agencies usually are formed to channel credit to a particular sector of the economy that Congress believes might not receive adequate credit through normal private sources.
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What is a Eurodollar bond, Euroyen bond, Yankee bond and Samurai bond?

A dollar-denominated bond sold in Britain would be called a Eurodollar bond. Similarly, investors might speak of Euroyen bonds, yen-denominated bonds sold outside Japan.
A Yankee bond is a dollar-denominated bond sold in the United States by a non-U.S. issuer. Similarly, Samurai bonds are yen-denominated bonds sold in Japan by non-Japanese issuers.

What are municipal bonds?

Municipal bonds are issued by state and local governments. They are similar to Treasury and corporate bonds except that their interest income is exempt from federal income taxation.

What are revenue bonds?

Revenue bonds are issued to finance particular projects and are backed either by the revenues from that project or by the particular municipal agency operating the project.  

What are industrial development bonds?

An industrial development bond is a revenue bond that is issued to finance commercial enterprises, such as the construction of a factory that can be operated by a private firm. In effect, these private-purpose bonds give the firm access to the municipality’s ability to borrow at tax-exempt rates, and the federal government limits the amount of these bonds that may be issued.

What is the equivalent taxable yield?

This is the rate a taxable bond must offer to match the after-tax yield on the tax-free municipal. The equivalent taxable interest rate increases with the investor’s tax bracket; the higher the bracket, the more valuable the tax-exempt feature of municipals. Thus high-tax-bracket investors tend to hold municipals.

What types of corporate bonds are there?

We distinguish only among;
- secured bonds, which have specific collateral backing them in the event of firm bankruptcy;
- unsecured bonds, called debentures, which have no collateral; and subordinated debentures, which have a lower priority claim to the firm’s assets in the event of bankruptcy.

- Callable bonds give the firm the option to repurchase the bond from the holder at a stipulated call price.

- Convertible bonds give the bondholder the option to convert each bond into a stipulated number of shares of stock.

What are mortgage backed securities?

A mortgage-backed security is either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool. 

What is the difference between conforming mortgages and subprime mortgages?

Conforming mortgages, which means that the loans must satisfy certain underwriting guidelines (standards for the credit- worthiness of the borrower) before they may be purchased by Fannie Mae or Freddie Mac.
Subprime mortgages, that is, riskier loans made to financially weaker borrowers, were bundled and sold by “private- label” issuers. 

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