Debt Securities and Fixed Income Flashcards

Which agency's bonds carry an implicit (not explicit) government guarantee?

Answer: Fannie Mae (FNMA)

Government-sponsored enterprises (GSEs) like Fannie Mae carry an implied but not legally guaranteed government backing.

A general obligation (GO) municipal bond is backed by:

Answer: The issuing government's taxing power

GO bonds are backed by the full taxing authority of the issuing municipality, making them generally less risky than revenue bonds.

What risk do bond investors face when interest rates fall and they must reinvest coupon payments at lower rates?

Answer: Reinvestment risk

Reinvestment risk is the risk that future coupon payments will be reinvested at lower interest rates than originally expected.

Which bond rating is considered 'investment grade' by Moody's?

Answer: Baa3

Moody's ratings of Baa3 and above are considered investment grade, indicating adequate creditworthiness.

What is accrued interest in bond trading?

Answer: Interest earned since the last coupon payment, owed to the seller

Accrued interest is the interest earned by the bond seller from the last coupon date to the settlement date, paid by the buyer.

A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

Answer: Changes in the Consumer Price Index (CPI)

TIPS adjust their principal value in line with CPI changes, protecting investors from inflation eroding their purchasing power.