Compare Fixed Income Types - Series 65

1. What is the key difference between sovereign and corporate foreign bonds?

   Sovereign: issued by a foreign government; corporate: by a company. Sovereign bonds carry country risk, while corporate add business-specific default risk.

2. What is the defining characteristic of a corporate bond's credit risk versus Treasuries?

   Corporate bonds have higher default risk than Treasuries. Corporates depend on the issuer's financial health, unlike Treasuries backed by the U.S. government's full faith and credit.

3. What is a municipal general obligation (GO) bond backed by?

   Issuer's taxing power (full faith and credit of the municipality). GO bonds rely on the municipality's unlimited taxing authority to ensure repayment.

4. Which option best describes the usual yield ranking for similar maturity: Treasury, municipal, corporate?

   Treasury lowest, municipal middle, corporate highest (typical). Yields reflect credit risk: Treasuries safest, munis tax-advantaged but riskier, corporates highest risk premium.

5. What is the typical relationship between yields on Treasuries and agency bonds of similar maturity?

   Agency yields are typically higher than Treasury yields. Agencies have marginally higher credit risk, requiring a yield premium to attract investors over risk-free Treasuries.

6. What is the typical ranking of corporate bond claims in liquidation: secured, debenture, subordinated?

   Secured first, then debentures, then subordinated debt. In bankruptcy, secured bonds claim specific collateral first, debentures are unsecured general claims, and subordinated rank last.

7. What is the defining feature of a Treasury bill (T-bill) regarding interest?

   Zero-coupon; sold at a discount and matures at par. T-bills do not pay periodic interest but provide return through the difference between purchase price and face value at maturity.

8. Identify the bond type that typically offers the greatest tax advantage to a U.S. taxable investor.

   Municipal bonds (generally federally tax-exempt interest). The federal tax exemption on muni interest provides a higher after-tax yield compared to taxable bonds.

9. What is a key risk unique to foreign-issued bonds for a U.S. investor?

   Currency (exchange rate) risk. Fluctuations in exchange rates can affect the bond's value and returns when converted back to USD.

10. What is the state and local tax treatment of interest on U.S. Treasury securities?

    Interest is exempt from state and local income tax. Federal law exempts Treasury interest from state and local taxes to encourage investment in government debt.

11. Identify the bond type that is typically considered the lowest credit risk among those listed.

    U.S. Treasury securities. Treasuries are benchmark risk-free assets due to the U.S. government's unparalleled creditworthiness.

12. What is the key credit backing of U.S. Treasury bonds and notes?

    Full faith and credit of the U.S. government. This backing ensures the lowest credit risk due to the government's ability to tax and print money, making Treasuries virtually default-free.

13. Which option best describes the credit backing of Fannie Mae (FNMA) and Freddie Mac (FHLMC) debt?

    No explicit U.S. government guarantee (GSE support only). As GSEs, they imply government support but lack a formal guarantee, leading to slightly higher yields.

14. What is the primary risk difference between municipal bonds and corporate bonds of similar maturity?

    Munis: tax risk and local credit; corporates: business default risk. Munis face risks from tax law changes and local economic factors, while corporates are vulnerable to company-specific failures.

15. What is the primary source of repayment for a corporate bond?

    Issuer cash flow and assets (per the bond's terms). Bonds are contractual obligations repaid from the company's operational earnings and asset sales if needed.

16. Which option best describes a Yankee bond?

    A foreign issuer's bond issued in the U.S. and denominated in U.S. dollars. Yankee bonds allow foreign entities to tap U.S. markets without currency risk for American investors.

17. What is the key difference between a Treasury bond and a Treasury note?

    Bond: long-term; Note: intermediate-term maturity. Treasury bonds typically mature in over 10 years, while notes mature in 2 to 10 years, distinguishing their term structures.

18. What is the federal income tax treatment of interest on U.S. Treasury securities?

    Interest is subject to federal income tax. The U.S. government taxes interest income from Treasuries as ordinary income, unlike state and local exemptions.

19. Which option best describes the credit backing of Ginnie Mae (GNMA) securities?

    Explicitly backed by the U.S. government. GNMA securities are mortgage-backed and guaranteed by the full faith and credit of the U.S. government.

20. What is a U.S. agency bond in Series 65 terms?

    Debt issued by a federal agency or government-sponsored enterprise. These bonds finance government-related activities but carry slightly higher risk than direct Treasuries.

21. What is a municipal revenue bond primarily backed by?

    Revenues from a specific project or enterprise. Revenue bonds are self-supporting, with repayment tied to income from facilities like toll roads or utilities.

22. What is the typical state income tax treatment for a municipal bond issued in the investor's home state?

    Often exempt from state income tax (state-specific rules apply). Many states exempt interest on in-state munis to promote local investment, though rules vary by jurisdiction.

23. What is the typical federal income tax treatment of interest on municipal bonds?

    Interest is generally exempt from federal income tax. The tax-exempt status under federal law reduces effective yields for investors in higher tax brackets.

24. What is the alternative minimum tax (AMT) relevance of certain municipal bonds?

    Private activity bond interest may be subject to AMT. Certain munis funding private projects may trigger AMT liability for some taxpayers, reducing their tax benefit.

25. Which option best describes a Eurobond (in Series 65 usage)?

    Bond issued outside the issuer's country, often in a third currency. Eurobonds facilitate international borrowing by avoiding domestic regulations and currency restrictions.

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