Javier Cuadra

Investments
Jacob Tenney
03/25/2020

CHAPTER 7 DISCUSSION QUESTIONS (1,4,6,9-10)

1.- Describe the difference between short and long-term debt securities.
Short-term securities are assets (usually of equity and debt instruments) intended to be
acquired and turned into cash within one year, or during the business period of the
firm. Such funds are used in liquid assets of a corporation, typically right after the
cash is disclosed. Long-term assets are not required to be sold and turned to cash
within a year, or during the business period of the firm, unlike short-term investments.
The investments can generally be made with an infinite retention period in mind.

4.-Distinguish between secured and unsecured bonds and identify which will
most likely have a higher yield to maturity.

Secured bonds are those collateralized by an asset, such as land, machinery (especially
for airlines, railroads, and transportation companies), or another income source.
Unsecured loans are not backed by a single commodity but rather by the issuer's "true
trust and confidence." In other terms, the borrower has the guarantee of getting back
from the lender but has no demand on particular guarantees.

6.-Describe the various types of Treasury securities.

There are four types of marketable treasury securities: Treasury bills, Treasury notes,
Treasury bonds, and Treasury Inflation Protected Securities.

Treasury bills are zero-coupon debt maturing in one year or less and charging no
interest. Alternatively, they are bought at a par value discount and ultimately priced at
the par value to achieve a positive yield to maturity.

Treasury notes (T-notes) have maturities of 2, 3, 5, 7, or 10 years, have a discount

payout every six months, and are priced in $100 installments. T-note values are
expressed as a percentage of the par value within thirty-seconds of a dollar on the
secondary market.

Treasury bonds (T-bonds, also referred to as a long bond) have the longest maturity at
30 years. Each six months, they get a discount bonus, like T-notes.
Treasury Inflation-Protected Securities (TIPS) are US-issued bonds that are indexed to
inflation Budget. The principal is calculated in reference to the Consumer Price Index
(CPI), the most commonly used inflation metric. The principal is adjusted upward as
the CPI rises; if the index declines the principal is adjusted downward. The coupon
rate is constant, but when compounded by the inflation-adjusted principal produces a
different level of interest, thereby shielding the investor from the inflation rate as
determined by the CPI. 1997 saw the launch of TIPS. At present, TIPS is sold at
maturities of 5 years, 10 years and 30 years.

9.-Discuss the significance of tranches in collateralized mortgage obligations.

A collateralized mortgage obligation (CMO) refers to a form of mortgage backed

security comprising a pool of mortgages that are pooled together and sold as a loan.
Organized by maturity and risk rating, CMOs collect cash flows as lenders redeem the
mortgages on certain assets that serve as leverage. In addition, CMOs allocate the
principal and interest fees based on predetermined guidelines and arrangements to
their creditors.

10.-Describe convertible bonds and discuss one critical reason any bondholder
would want to own such a bond.

A convertible bond is a portfolio of fixed-income securities that pays interest

payments, which may be exchanged into a specified amount of common stock or
equity shares. The transfer from bond to stock can be achieved over the lifetime of the
bond at several occasions, which is typically at the bondholder's discretion.

And in my opinion a one critical reason any bondholder would want to own such a
bond is because investors earn fixed rate interest payments with the right to convert to
equity and benefit from an increase of asset values.