Debt Securities — Series 7 Cheat Sheet

1. The Fundamental Bond Rule

Interest rates and bond prices move in OPPOSITE directions. |---|---|---| Duration: Higher duration = greater price sensitivity. Longer maturity + lower coupon = higher duration. ---

2. Yield Hierarchy for Premium vs. Discount Bonds

|---|---|---| Memory trick: For discounts, all yields stack UP above coupon. For premiums, all yields fall DOWN below coupon. Current Yield formula: Annual interest ($) / Market price TEY formula: Muni yield / (1 - marginal tax rate) ---

3. Corporate Bond Liquidation Priority (Highest to Lowest)

Secured creditors (mortgage bonds, equipment trust certificates)

General/unsecured creditors (debentures, trade payables)

Subordinated debenture holders

Preferred stockholders

Common stockholders — always last

Exam trap: "Debentures" = unsecured. "Subordinated debentures" = below regular debentures. Common stock = last always. ---

4. Municipal Bond Tax Treatment

|---|---| Tax-Equivalent Yield (TEY): TEY = Muni yield / (1 - tax bracket) Example: 4% muni, 35% bracket — 4% / 0.65 = 6.15% TEY Higher bracket = higher TEY = munis more attractive GO bonds: Backed by taxing power; require voter approval; safer; lower yield Revenue bonds: Backed by project revenues only; no voter approval; higher yield ---

5. T-Bill Discount Formula

T-Bills trade at a discount to $10,000 face value. The return is the discount itself. Dollar return = Face value - Purchase price Bank Discount Yield = (Discount / Face value) x (360 / Days to maturity) Example: Buy at $9,750, mature at $10,000, 182-day T-Bill

• Dollar return = $250

• Discount yield = ($250 / $10,000) x (360 / 182) = 2.5% x 1.978 = 4.95%

Note: Discount yield uses 360-day year and face value as denominator — understates true return vs. 365-day actual yield. ---

6. GNMA vs. FNMA vs. FHLMC

|---|---|---|---| The single most-tested fact: Only GNMA carries the full faith and credit of the U.S. government. Prepayment risk: When rates fall, homeowners refinance — investors get principal back early — forced to reinvest at lower rates. Extension risk: When rates rise, prepayments slow — bond duration extends — price drops more than expected. ---

7. Money Market Instruments Quick Reference

|---|---|---|---|---|---| SOFR (Secured Overnight Financing Rate): Transaction-based benchmark replacing LIBOR. Based on overnight Treasury repo trades. Published by NY Fed. ---

8. TIPS and STRIPS Quick Rules

TIPS:

• Principal adjusts with CPI (up with inflation, down with deflation)

• Coupon % is fixed; dollar coupon rises/falls with adjusted principal

• At maturity: receives greater of adjusted principal or original par

• Phantom income: annual inflation adjustment is taxable even without cash — best in tax-deferred accounts

STRIPS:

• Created by separating Treasury coupon payments from principal

• Each payment becomes a separate zero-coupon bond

• Sold at deep discount; redeems at face value

• Phantom income: annual accretion is taxable — best in IRAs/401(k)s

---

9. Corporate Bond Feature Summary

|---|---|---|---|

Rate Move	Bond Price	Why
Rates rise	Price falls	New bonds pay more; old bonds less attractive
Rates fall	Price rises	Old bonds pay more than new; more valuable
Bond Type	Price vs. Par	Yield Order (High to Low)
Discount bond	Price < Par	YTM > Current Yield > Coupon
Par bond	Price = Par	YTM = Current Yield = Coupon
Premium bond	Price > Par	Coupon > Current Yield > YTM
Tax Type	Treatment
Federal income tax	ALWAYS exempt (all munis)
State/local tax	Exempt ONLY in the state that issued the bond
Federal estate tax	NOT exempt — munis are in taxable estate
AMT	Certain private activity bonds ARE a preference item
Feature	GNMA (Ginnie Mae)	FNMA (Fannie Mae)	FHLMC (Freddie Mac)
Type	Government agency	GSE (private)	GSE (private)
U.S. gov guarantee	YES — explicit, direct	NO — implied only	NO — implied only
Mortgage type	FHA/VA (gov-insured)	Conventional	Conventional
Securities issued	MBS pass-throughs	MBS / notes	Participation certificates
Credit quality	Equal to Treasuries	Below Treasuries	Below Treasuries
Instrument	Issuer	Maturity	Secured?	Min Size	Notes
T-Bills	U.S. Treasury	4-52 weeks	U.S. gov	$100	Risk-free benchmark
Commercial Paper	Corporations	1-270 days	Unsecured	$100,000	Avoids SEC reg under 270 days
Banker's Acceptance	Bank (on behalf of importer)	30-180 days	Bank guarantee	Varies	Used in international trade
Repo	Dealer (borrower)	Overnight-30 days	Treasuries/gov securities	Varies	Dealer borrows via securities sale
Negotiable CD	Commercial bank	2 weeks-1 year	Bank obligation	$100,000	FDIC covers only first $250k
Federal Funds	Banks (to banks)	Overnight	Unsecured	$1M+	Rate set by FOMC target
Eurodollars	Foreign banks	Short-term	Unregulated	$1M+	USD held outside U.S.; no FDIC
Feature	Callable Bond	Convertible Bond	Secured Bond
Who benefits	Issuer (can refinance)	Investor (equity upside)	Investor (collateral)
Coupon vs. plain bond	Higher yield (call risk)	Lower yield (conversion value)	Lower yield (safer)
Key risk	Reinvestment risk (investor)	Dilution risk (existing shareholders)	Collateral value risk
Key formula	YTC = yield if called early	Parity price = Bond price / Conversion ratio	N/A

Conversion Price = Par ($1,000) / Conversion ratio (shares per bond) Parity Price = Market price of bond / Conversion ratio ---

10. Quick-Fire Exam Reminders

• Commercial paper max = 270 days (under this = no SEC registration)

• T-Bill uses 360-day year for discount yield calculation

• Eurodollars = USD deposits outside U.S. — no Fed regulation, no FDIC

• Repo from dealer's view = borrowing. From investor's view = reverse repo (lending)

• GO bonds = voter approval required. Revenue bonds = no voter approval

• Moody's investment-grade cutoff = Baa. S&P cutoff = BBB

• Only GNMA has direct U.S. government guarantee — not FNMA or FHLMC

• Subordinated debentures rank below regular debentures in liquidation

• SOFR replaced LIBOR — transaction-based, manipulation-resistant