6- Debt: Types and Features

Question 1

What is the difference between bonds and bills?

Answer 1

Bills are debt securities with maturities of less than a year, whereas those of bonds are greater

Question 2

What is the Debt Management Office (DMO)?

Answer 2

Office ensuring that the government can borrow the money it requires to fund the Public Sector Net Cash Requirement (PSNCR)/the deficit

Question 3

What are the 3 types of conventional gilts?

Answer 3

-Shorts (<5 years)
-Mediums (5-15 years)
-Longs (>15 years)

Question 4

What are the 2 types of Non-conventional gilts?

Answer 4

-Undated (perpetual)
-Index linked

Question 5

What are strippable gilts?

Answer 5

Gilts that can be stripped into various zero coupon bonds

Question 6

What is a repo?

Answer 6

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

Question 7

What is an open repo?

Answer 7

A repo with no fixed time for repurchase

Question 8

What is a term repo?

Answer 8

Repos with maturity in excess of overnight

Question 9

What are the 2 types of secured debt securities/debentures?

Answer 9

-Fixed charge over assets
-Floating charge over assets

Question 10

What is a Fixed charge over assets?

Answer 10

A fixed charge is security over a certain specific company asset e.g. a building

Question 11

What is a Floating charge over assets?

Answer 11

A floating charge is security over a class of assets e.g. plant and machinery

Question 12

What are the 5 steps of a CDO?

Answer 12

-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

Question 13

What are Floating Rate Notes (FRNs)?

Answer 13

Coupon floats in line with market interest rates

Question 14

What are Callable bonds?

Answer 14

Can be redeemed early at the discretion of the issuer

Question 15

What are Puttable bonds?

Answer 15

Can be redeemed early at the discretion of the holder

Question 16

What are Sinking fund provisions?

Answer 16

Enables issuer to pay off some of the capital each year

Question 17

What are Protective covenants?

Answer 17

Protects the income streams for bond holders

Question 18

What are Convertible provisions?

Answer 18

Shows the terms of conversion to equity

Question 19

What are International bonds (eurobonds)?

Answer 19

Bonds denominated in a currency held in a country from where it does not originate

Question 20

What are the 2 key defining characteristics of CoCos?

Answer 20

The mechanism by which losses are absorbed and the trigger that activates that mechanism

Question 21

What is Convertible loan stock?

Answer 21

An unsecured corporate bond that can be converted into the equity of the issuer

Question 22

What are the 2 types of convertible loan stock?

Answer 22

-Regular convertible (converted at discretion of holder)
-Contingent convertible (converted at pre-defined trigger)

Question 23

What is the formula for conversion price?

Answer 23

Conversion price = Par value of bond/Conversion ratio

Question 24

What are the 2 main CoCo triggers?

Answer 24

-Book-market triggers (using accounting ratios)
-Discretionary triggers (activated at a point of non-viability of the company)

Question 25

What are the 2 main loss absorption mechanisms?

Answer 25

-Convert debt to equity
-Principal write-down

Question 26

What is the Conversion Premium formula of convertible loan stock?

Answer 26

Conversion Premium = (Market price of bond/Conversion ratio) - Market price of share

Question 27

What is the Conversion value formula of convertible loan stock?

Answer 27

Conversion value = Market price per share x Conversion ratio