2 - Gov debt; Corp. Debt; cash assets; Eurobonds Flashcards
Name the below alongside their maturity terms:
3 Types of US Gov. Bonds.
3 maturity terms for Gilts
3 german bonds
French bonds
Japan
US - T-Bills, Notes and Bonds, less than 1 year, 2-10 yrs and >10 years respectively.
UK- Short-dated, medium dated and long-dated; 0-7,7-15,15<.
France = OAT 2-50
Germany: Schatz,Bobl and Bund; 0-2,5yrs, 10<
Japan; JGB- 2-40
For bonds from germany, france, uk, us and japan, what are the respective coupon frequency and settlement period?
Semi annual- UK , Japan
Annual - France, Germany
US- Semi annual apart from Bills where no coupon is paid.
Settlement:
T+1 - UK, Japan, (US except ZCBs)
T+2 - France, Germany
US Bills - Trade Date
Who strips gilts
GEMMs, BoE and HMT
Purpose of STRIPS, why would an investor use STRIPS
Accuracy of return - if investor needs 3 mil£ in 5 years, then they can buy a 3 mil£ ZCB now and will get the precise return needed for payment. Meets liquidity needs.
Bottom line is they meet liquidity requirements well.
From a bond with 4 payments left, how many securities can be created?
5
Two Examples and how coupon payments and principle is adjusted
- US TIPS- CPI index, the principle is periodically adjusted, with respect to the CPI at inception. The coupon rate is not altered but the value of the payment is a % of the principal which has been adjusted
- UK Index Linked Gilts - RPI -
- What is an Index Ratio?→RPI now (3 months ago) / RPI at issue
- Uses a 3 month rule for “ reference RPI”, so for June 1, the RPI is (June - 3). Then for June 10, RPI is [(July 1 - June 1) x 10/31]
- The coupon is adjusted as follows; [principle x index ratio x coupon freq x coupon rate]. coupon frq is semi annual = 1/2
- Thee principle is adjusted as: Index ratio x principal at time of payment
What is an indenture and covenant?
An indenture is a contract that has covenants within it. A covenant is a promise.
For which debt tier is Payment in Kind used and potential to partake in equity returns?
Mezzanine: Where the high interest is often added to the outstanding principle, which is called payment in kind.
What is the difference between mezzanine debt and convertible bonds?
Mezzanine debt includes warrants and other ways of participating in equity returns, but not necessarily a conversion option.
Often subordinated debt is unsecure. Why would a corporate issue an unsecured subordinated bond
the issuer gets better regulatory treatment by regulator.
Investor gets higher coupon due to risk, but a greater risk of default
What is a debenture in the UK, and what is a debenture in the us.
UK - Debenture refers to a secured debt security
US - debenture means loan with no security
What is the role of a trustee and how do they fulfil this role?
What are the different types of trustee?
Represent investor interests byholding the corporate to certain standards via a legal contract, such as a minimum asset:liability ratio
- Note Trustee - Offers guidance to the originator and protects investor interests. No legal title involved
- Successor Trustee - Acts when the originator cannot continue (default or C.of Interest)
- Security Trustee - JPM pay the trustee the security interest (also referred to as ‘charged’). Then, according to agreements, the trustee pays the entitled parties in order of priority. Furthermore, the trustee holds legal title to the security.
- Share Trustee - Borrowers pay the debtors, who sell into an SPV. This SPV is often a subsidiary. A share trustee holds shares in this SPV. This ownership of shares better establishes the separation of the assets from the originators balance sheets, helping the SPV identify as a separate legal entity. The trustee then pays those entitled.
Who appoints a trustee, are they used in equities or bonds?
What are the benefits of a trustee?
The issuer of a corporate bond will appoint a trustee to get the interest of investors.
A trustee collects interest payments from corporate and then distributes.
To investors; there is more organization behind reimbursement and admin, often leading to fairer reimbursement
To Corp: Investors are more interested. Plus the co. doesn’t have to defend how investors are reimbursed.
There is also a lower admin cost.
What is a repo rate? Who enters into a reverse repo agreement?
Which cash movement is larger, the first or second?
Why is a party allowed to sell the bond in a repo, isnt it part of the repo agreement?
What is the term used to refer to what is essentially the rate of interest on the “loan” in a repo, and is this rate higher or lower in the DMO repo facilities?
a repo rate is the difference between the 2 cash flows of a repo agreement, expressed as a percentage.
The party purchasing the securities is entering into a reverse repo agreement.
They have bought the bond, it is theres, however the party who has bought the sahres ahs entered into a contract that obligates them to deliver the same for a set price in the future.
repo rate - higher
What is the difference between a covered bond and an Asset-Backed security?
Which one is off-balance sheet financing?
What is bankruptcy remote?
Is an SPV a trust?
Does ab SPV increase or decrease gearing?
ABSs use SPVs., meaning it is off-balance sheet financing
bankruptcy remote describes the positive effect of using an SPV where the interest payments are still made in the case of the originators bankrupty. This is because the assets are isolated from the entities balance sheet.
