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A "STRIP" is a Treasury security in which the periodic interest payments are separated from the final principal payment. Explain how a "STRIP" functions in the securities market.
It effectively creates two sets of securities that can be purchased.
- The components are referred to as "Treasury zero bonds or Treasury zero coupon bonds."
- One can purchase a security that is the payment of the coupon interest in any given period.
Public offerings of municipal bonds, offered through an investment-banking firm, can be underwritten by the investment banker on a firm commitment basis or on a best effort basis. Explain the basic difference between these two underwriting methods.
The firm commitment basis is when the investment banker purchases the full offering and assumes a risk in hopes of selling the offering at a profit. (This guarantees the municipality the funds for the bond issue)
- The best effort underwriting does not guarantee a firm price to the municipality, and the investment banker incurs no risk and only gets a fee for the sale.
Jim is interested in purchasing some fully taxable corporate bonds paying 8 percent rather than municipal bonds that are free from federal tax. Jim's marginal federal tax rate of 30 percent. What is the minimum rate that the municipal bonds would have to pay to be equal to the 8 percent corporate bond rate?
8% x (1 - .30) = 5.6% Corporate bond tax free equivalent rate.
Explain the basic difference between a corporate term bond and a corporate serial bond.
A term bond is a bond in which the entire issue matures on a single date, while serial bonds mature on a series of dates, with a portion of the issue paid off on each.
A Eurobond is a type of international bond.
(a) Explain in which market the Eurobond is issued.
(b) In what currency are most Eurobonds issued?
(a) Eurobonds are issued in countries outside Europe.
(b) The U.S. dollar (accept other than the Euro)
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