(R42) Fixed Income Securities: Defining Elements Flashcards

1
Q

Basic Features of a Fixed Income Security

A

Issuers, maturity, Par value, coupon rate/frequency, currency,

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2
Q

Main issuers of fixed income securities

A
  • Supranational organizations
  • government (sovereign and non-sovereign)
  • corporate

Sovereign is federal level and non-sovereign is at state level

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3
Q

Maturity vs. Term to maturity

A

Maturity - date when principal is due (maturity date)

Term to maturity (tenor) - time remaining to maturity

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4
Q

Money market vs capital market securities

A

original maturity <1 year vs. original maturity >1 year

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5
Q

Describe relationship between bond price and YTM

A

Bond price and the yield to maturity are inversely related.

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6
Q

Discount vs. Premium Bond

A

Discount is a bond that is selling for less than its par value; premium is selling for more than par

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7
Q

Coupon rate

A

Annual percentage of par value that will be paid to bondholders (zero coupon is a discount bond with no coupon). Coupon rate x par value

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8
Q

What are credit enhancements? What is the difference between internal and external credit enhancements?

A

These reduce the credit risk of a bond; Internal includes subordination/credit trenching, overcollateralization, excess spread; External includes surety bonds and letter of credit

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9
Q

What is a covenant?

A

Covenants are provisions of a bond indenture that protect the bondholders’ interests. These are legally enforceable rules

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10
Q

Affirmative covenants

A

Affirmative covenants are administrative actions the issuer must perform, such as making the interest and principal payments on time; comply with all laws and regulations, pay taxes

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11
Q

Negative covenants

A

Negative covenants are restrictions on a bond issuer’s operating decisions. What an issuer will not do.

Example: prohibiting the issuer from issuing additional debt or selling the assets pledged as collateral; restrictions on debt such as max debt ratios and/or minimum interest coverage ratios; restrictions on prior claims; restrictions on asset disposal; restrictions on investments

The purpose is to protect bondholders

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12
Q

Dual Currency Bond

A

Coupon in one currency and payment in another

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13
Q

Define bond indenture and the three main items to be included

A

A bond indenture is a legally binding contract between bond issuer and bondholder. Bond indenture must include: Form of bond, Obligations of issuer, and rights of bondholders

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14
Q

Secured vs. Unsecured bonds

A

Secured: backed by a claim to specific assets of a corporation, which reduces the risk of default, and consequently, the yield that investors require on the bonds. Unsecured: represent a claim to the overall assets and cash flows to the issuer. Secured bonds are paid first

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15
Q

Zero coupon bond

A

No coupon or interest payments and sold at a discount

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16
Q

Coupon rate and YTM relationship for premium and discount bonds

A

Premium bond: coupon rate > YTM

Discount bond: coupon rate < YTM

17
Q

Define a bond with a bullet structure

A

Pays coupon interest periodically and the principal all at maturity (this is the most common type of cash flow structure). Aka plain vanilla

18
Q

Define a bond with a fully amortizing structure

A

Equal periodic payments of interest and principal where the principal is reduced to zero by maturity (i.e. paying car loan or personal loan)

19
Q

Define a bond with a partially amortizing structure

A

Mix of bullet structure and fully amortizing that calls for period payments of interest and principal but a balloon payment is needed at maturity to reduce principal to zero

20
Q

Define a bond with a sinking fund arrangement

A

Some % of bond is put aside each year to make payments.

21
Q

Fixed rate bond vs. floating rate bond

A

Floating-rate notes have coupon rates that adjust based on a reference rate such as Libor. There is very little volatility since coupons are reset at market rates on each coupon date. There is higher coupon volatility. With this you get uncertain cash flows. May have a cap and floor rate

Fixed coupon (conventional bond): you will get certain cash flows and more price volatility

22
Q

Callable Bonds

A

Issuer has the right to redeem (call) all or part of the bond before maturity. Benefits the issuer because the issuer can call the bond back if there is a decline in interest rate (Higher coupon or lower price)

23
Q

Domestic vs. Foreign vs. Eurobond

A

Domestic: Issuer, country, and currency all match
Foreign: country and currency match, issuer does not
Eurobond: issued outside jurisdiction of any country

24
Q

Putable Bonds

A

Allows the bondholder to sell bonds back to the issuer at a specified put price. Benefits bondholder because it protects the holder against a rise in rates. (Lower yield or higher prices

25
Q

Conversion Bonds

A

Conversion options allow the bondholder to exchange bonds for a specified number of shares of the issuer’s common stock; Lower yield or higher price; Issuer pays lower interest, plus may avoid principal repayment

26
Q

Step-up coupon bonds

A

Coupon increases over time

27
Q

Credit-linked coupon bonds

A

Coupon increases/decreases when bond’s credit rating decreases/increases.

28
Q

Payment-in-kind bonds

A

Interest paid with more amounts of the bond (or with common shares)

29
Q

Deferred coupon bonds

A

No coupon payments for the first few years

30
Q

Index-linked bonds

A

Coupons are linked to some index