1.

Classification of Bonds:

Treasury Securities- Bonds, bills, and notes issued by the U.S. government are generally
called “Treasuries” and are the highest-quality securities available. All treasury securities
are liquid and traded on the secondary market. They are differentiated by their maturity
dates, which range from 30 days to 30 years. One major advantage of Treasuries is that the
interest earned is exempt from state and local taxes.

Treasury bills (T-bills)- short-term securities that mature in less than one year.
Treasury notes (T-notes)- earn a fixed rate of interest every six months and have maturities
ranging from 1 to 10 years.
Treasury bonds (T-bonds) - have maturities ranging from 10 to 30 years.
Treasury Inflation-Protected Securities (TIPS) - are inflation-indexed bonds. The principal
value of TIPS is adjusted by changes in the Consumer Price Index. They are typically offered
in maturities ranging from 5 to 20 years.

Municipal Bonds- (“munis”) are issued by state and local governments to fund the
construction of schools, highways, housing, sewer systems, and other important public
projects.
General obligation bonds -are secured by the full faith and credit of the issuer and
supported by the issuer’s taxing power.
Revenue bonds -are repaid using revenue generated by the individual project the bond was
issued to fund.

Corporate Bonds- Corporations may issue bonds to fund a large capital investment or a
business expansion. Corporate bonds tend to carry a higher level of risk than government
bonds, but they generally are associated with higher potential yields.
high -yield bonds- also called “junk bonds”. Bonds issued by companies with low credit
quality
convertible bonds- can be converted into company stock under certain conditions.

Zero-Coupon Bonds- (also called an “accrual bond”) doesn’t make coupon payments but is
issued at a steep discount. The bond is redeemed for its full value upon maturity. They can
be issued by the U.S. Treasury, corporations, and state and local government entities and
generally have long maturity dates.

2. STRIPS Security- Separate Trading of Registered Interest and Principal Securities

(STRIPS) were created to provide investors with another alternative in the fixed-income
arena that could meet certain investment objectives that were difficult to achieve using
traditional bonds and notes. The strip is the process of removing coupons from a bond and
then selling the separate parts as a zero coupon bond and an interest paying coupon bond.
In the context of bonds,
stripping is typically done by a brokerage or other financial institution. "strip" is used to
both describe actions taken in the bond market as well as the options market. In the bond
market, coupon bonds are literally stripped of their coupons and principle and sold as z-
bonds and interest-bearing debt. In the options market, a strip is an investor strategy that
takes the opposite position of a variant.

3. Treasury notes and bonds are issued through yield auctions of new issues for cash. Bids
are separated into competitive bids and noncompetitive bids. Competitive bids are made
by primary government dealers, while noncompetitive bids are made by individual
investors and small institutions. Competitive bidders bid yields to three decimal places for
specific quantities of the new issue. Two types of auctions are currently used to sell
securities:

Multiple-price auction- Competitive bids are ranked by the yield bid, from lowest to highest.
The lowest price (highest yield) needed to place the allotted securities auction is
determined. After all Treasuries are allocated to noncompetitive bidders, the remaining
securities are allocated to competitive bidders, with the bidder bidding the highest price
(lowest yield) being awarded first. This procedure continues until the entire allocation of
securities remaining to be sold is filled.

Single-price auction- each successful competitive bidder and each noncompetitive bidder is
awarded securities at the price equivalent to the highest accepted rate or yield. This type of
auction is used for 2-year and 5-year notes.

4. General Obligation Bonds

General obligation bonds are securities guaranteed by the “full faith and credit” of a
government with taxing power. These bonds typically are used to finance capital
improvement projects such as streets, roads and public buildings. With these bonds, the
state or local government bond issuer pledges to use its general taxing power to repay the
bondholders. Because these bonds place a general obligation on all taxpayers to cover bond
repayments, the voters of a state or local government typically must approve general
obligation bonds before they are issued.

Revenue Bonds

Revenue bonds are repaid from the revenues generated by the project the bonds financed.
These bonds finance revenue-producing projects such as industrial parks, toll roads,
convention centers, sports stadiums or water and sewer utilities. Projects may generate
revenues through things like user fees, admission charges, rents or lease payments, or
concession fees. In most
instances, revenues from the project go into a revenue fund from which operating expenses
and bond repayments are drawn.

5. Best efforts -is a contractual term in which an underwriter promises to make its best
effort to sell as much of a securities offering (e.g., IPO) as possible. Best-effort agreements
are used mainly for securities in a less-than-ideal market condition or with higher risk,
such as an unseasoned offering. Firm commitment- A bought deal is a securities offering in
which an investment bank commits to buy the entire offering from the client company. A
bought deal eliminates the issuing company’s financing risk, ensuring that it will raise the
intended amount.

The difference of the two is that Underwriters and issuers can handle public offerings in
different ways. In contrast to a best-efforts agreement, a bought deal, also known as a firm
commitment, requires the underwriter to purchase the entire offering of shares. The
underwriter's profit is based on how many shares or bonds it sells, and on the spread
between their discounted purchase price and the price at which they sold the shares.

6. Corporate bonds offer a higher rate of return than federal or municipal bonds because
they're a riskier investment. They're considered a safer investment than stocks, however,
because if a corporation goes bankrupt, bond-holders are in line to be paid ahead of
stockholders.

They’re a liquid investment: They can be and are sold before maturity and there's a
thriving secondary market in corporate bonds. Another benefit is that the interest
payments—typically semiannual—provide a steady income stream.

Corporate bond prices are influenced not only by the issuer's credit rating but the general
level of interest rates and the length of maturity. Short-term bonds mature in five years or
less; medium-term bonds mature in five to 12 years; long-term bonds take more than 12
years.

7. For a financial institution, ratings are developed based on specific intrinsic and external
influences. Internal factors include such traits as the overall financial strength rating of the
bank – a risk measure illustrating the probability that the institution will require external
monetary support. The rating depends on the financial statements of the firm under
analysis and the corresponding financial ratios. External influences include networks with
other interested parties, such as a parent corporation, local government agencies and
systemic federal support commitments. The credit quality of these parties must also be
researched. Once these external factors are analyzed, a comprehensive overall external
score is given.