6- Debt: Types and Features Flashcards
What is the difference between bonds and bills?
Bills are debt securities with maturities of less than a year, whereas those of bonds are greater
What is the Debt Management Office (DMO)?
Office ensuring that the government can borrow the money it requires to fund the Public Sector Net Cash Requirement (PSNCR)/the deficit
What are the 3 types of conventional gilts?
-Shorts (<5 years)
-Mediums (5-15 years)
-Longs (>15 years)
What are the 2 types of Non-conventional gilts?
-Undated (perpetual)
-Index linked
What are strippable gilts?
Gilts that can be stripped into various zero coupon bonds
What is a repo?
Cash is given to the borrower, in exchange for an interest paid back (repo rate) and gilt collateral which is typically worth more than the cash
What is an open repo?
A repo with no fixed time for repurchase
What is a term repo?
Repos with maturity in excess of overnight
What are the 2 types of secured debt securities/debentures?
-Fixed charge over assets
-Floating charge over assets
What is a Fixed charge over assets?
A fixed charge is security over a certain specific company asset e.g. a building
What is a Floating charge over assets?
A floating charge is security over a class of assets e.g. plant and machinery
What are the 5 steps of a CDO?
-Debtor agrees to monthly payment reflecting capital plus interest for a fixed period
-Lender sells repayments to an SPV
-SPV pools debt with others and securitises them producing an ABS
-CDO is sold on to an investment company
-Money raised is passed on to lender as payment for the debt repayments
What are Floating Rate Notes (FRNs)?
Coupon floats in line with market interest rates
What are Callable bonds?
Can be redeemed early at the discretion of the issuer
What are Puttable bonds?
Can be redeemed early at the discretion of the holder
What are Sinking fund provisions?
Enables issuer to pay off some of the capital each year
What are Protective covenants?
Protects the income streams for bond holders
What are Convertible provisions?
Shows the terms of conversion to equity
What are International bonds (eurobonds)?
Bonds denominated in a currency held in a country from where it does not originate
What are the 2 key defining characteristics of CoCos?
The mechanism by which losses are absorbed and the trigger that activates that mechanism
What is Convertible loan stock?
An unsecured corporate bond that can be converted into the equity of the issuer
What are the 2 types of convertible loan stock?
-Regular convertible (converted at discretion of holder)
-Contingent convertible (converted at pre-defined trigger)
What is the formula for conversion price?
Conversion price = Par value of bond/Conversion ratio
What are the 2 main CoCo triggers?
-Book-market triggers (using accounting ratios)
-Discretionary triggers (activated at a point of non-viability of the company)
What are the 2 main loss absorption mechanisms?
-Convert debt to equity
-Principal write-down
What is the Conversion Premium formula of convertible loan stock?
Conversion Premium = (Market price of bond/Conversion ratio) - Market price of share
What is the Conversion value formula of convertible loan stock?
Conversion value = Market price per share x Conversion ratio
