Questions and Answers
What are Eurodollars?
Eurodollars are US dollars deposited in banks outside the United States.
What security is guaranteed by the full faith and credit of the US Government?
GNMA
How are Eurobonds and Eurodollar bonds paid?
Who can issue Eurodollar Bonds?
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Who does not issue Eurodollar bonds?
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How is a NY resident that purchases a NY OG Bond taxed?
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What is analyzed when doing a cash flow analysis for mortgage-backed securities?
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What does the YTC computation factor?
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How are Treasury securities issued?
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When investing in a foreign bond market, when will a customer profit?
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What type of bonds does a corporation domiciled in the UK issue when they are US dollar-dominated?
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What are ADRs?
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What are bonds issued by a borrower in a foreign country denominated in a currency other than one native of the issuer's country?
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What is the net present value of a bond with an 8% coupon when current market rates are 6%?
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What is expected of DERP Corp's 5% convertible debentures selling at 120 with a conversion price of $40?
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What are some characteristics of commercial paper?
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Study Notes
Eurodollars
- Eurodollars are deposits of US dollars in banks located outside the United States.
GNMA
- GNMA (Government National Mortgage Association) securities are backed by the full faith and credit of the US Government.
Eurobonds and Eurodollar Bonds
- Eurodollar bonds are paid in US dollars.
- Eurobonds are paid in foreign currency.
Issuers of Eurodollar Bonds
- Eurodollar bonds can be issued by foreign corporations, foreign governments, domestic corporations, and domestic governments.
- The US government does not issue Eurodollar bonds.
Taxation of NY OG Bonds
- NY residents purchasing NY OG Bonds are not subject to Federal Income Tax.
- Municipal bond interest is typically taxed at the state level, but many states exempt interest on their own municipal bonds.
Cash Flow Analysis
- Average maturities are important when analyzing mortgage-backed pass-through securities, which distribute interest and principal to investors.
Yield to Call (YTC) Calculation
- YTC computation considers the amount of interest payment, call length, current price, and call price.
Issuance of Treasury Securities
- Treasury securities are issued in book entry form.
- T-bills are issued at a discount.
Foreign Bond Market Investment
- Investors profit when the US Dollar weakens and foreign currency strengthens when investing in foreign bonds.
Yankee Bonds
- Yankee bonds are US dollar-dominated bonds issued in the US by foreign corporations and governments.
American Depository Receipts (ADRs)
- ADRs are issued by domestic banks and represent receipts for securities traded on foreign exchanges.
Definition of Foreign Bonds
- Foreign bonds are issued by borrowers in a foreign country and denominated in a currency other than that of the issuer's country.
Bond Valuation
- A bond with an 8% coupon is likely to have a net present value of zero when the current market rate is at 6%, as the internal rate of return matches the market rate.
Convertible Debentures
- DERP Corp's 5% convertible debentures, maturing in 2030 and selling at 120 with a conversion price of $40, indicate that common stock is expected to sell somewhat below $48 per share due to a slight premium over its parity price.
Characteristics of Commercial Paper
- Commercial paper consists of unsecured debt obligations issued by corporations for short-term financing, typically with maturities not exceeding 270 days, and is exempt from registration requirements.
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Description
Test your knowledge with these flashcards on Eurodollars, Eurobonds, and GNMA securities. This unit focuses on essential concepts related to international finance and securities issued in different currencies. Perfect for students looking to enhance their understanding of financial instruments.
