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Fixed-income Securities > bond market > Flashcards

bond market Flashcards

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SIE Exam flashcards
1
Q

bond is an instrument of

A

debt

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2
Q

debt is an instrument of

A

an obligation

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3
Q

types of assets

A

1,financial (non physical like stocks and bonds)

2,real (physical like stores real estet etc.)

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4
Q

bond sectors

A 
1 treasury
2 agency
3 municipal
4 corporate
5 asset-backed securities
6 mortages
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5
Q

types of treasuries

A 
1 bill (maturity of  1yr.) 
2 note (10yrs.)
3 bond (10yrs.+)
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6
Q

agency

A

bonds for gov. agencies(cia.fbi etc.)

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7
Q

municipal

A

bonds for local gov. (like local schools,local states like ohio etc.)

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8
Q

corporate

A

1 bonds
2 medium-term notes
3 commercial paper
4 structured notes

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9
Q

what does default mean?

A

Default is the failure to repay a debt. A default can occur when a borrower is unable to make timely payments, misses,avoids or stops making payments.

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10
Q

investment grade

A

relatively low risk of default

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11
Q

non investment grade(junk bonds)

A

high risk of default

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12
Q

asset-backed securities

A

securitization of assets

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13
Q

securitization

A

Securitization involves taking an illiquid asset or group of assets and transforming them into one security. They doing it in most cases of debt

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14
Q

prime borrower

A

low risk borrower(low probability of default)

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15
Q

subprime borrower

A

high risk borrower (high probability of default)

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16
Q

coupon payment

A

annual interest payment that the bondholder receives from the bond’s issue date until it matures

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17
Q

liquidity

A

refers to how easily assets can be converted into cash

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18
Q

face value

A

the face value is the original cost of the

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19
Q

inverse floater

A

a bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate

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20
Q

how do investors make money with zero coupon bonds?

A

by buying them for less than their face value and collecting their principal and interest payments together at maturity.

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21
Q

reference rate

A

interest rate benchmark used to set other interest rates

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22
Q

libor

A

(London Inter-bank Offered Rate)benchmark interest rate at which major global banks lend to one another

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23
Q

what does coupon rate=6%-libor mean?

A

if libor is 1% coupon rate will be 5%, if libor 2% coupon rate will be 4% and so on

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24
Q

what is LBO?

A

Leverage Buy Out is is a type of acquisition whereby the cost of buying a company is financed primarily with borrowed funds

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25
Q

deferred coupon bond

A

A bond whereby the issuer is allowed to defer coupon interest for a specified period of time. usually pays with bond not with actual cash

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26
Q

embedded option

A

is a component of a security that gives either the issuer or the holder the right to take some specified action at present or in the future

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27
Q

convertible bond

A

hybrid instrument of debt and equity(for example a bond holder can convert the bond into a fixed number of stocks)

28
Q

conversion ratio

A

the number of shares that you can get for 1 bond(if you decide to convert it)

29
Q

exchangeable bond

A

the bond can be changed into a fixed number of shares of another company

30
Q

CUSIP number

A

is a unique identification number assigned to stocks and registered bonds.It comprises nine letters and includes letters and numbers

31
Q

immunization

A

is a strategy that ensures that a change in interest rates will not affect the value of a portfolio

32
Q

credit rating

A

a measurement of a person or business entity’s ability to repay a financial obligation based on income and past repayment histories.

33
Q

credit risk

A

the risk that a lender will not get paid all principal and interest on time as scheduled on a loan or other borrower obligation

34
Q

credit sread

A

is the difference between the quoted rates of return on two different investments, usually of different credit qualities but similar maturities.

35
Q

inflation risk

A

the risk that inflation reduces the value of an investment. Bonds are particularly susceptible to purchasing power risk(If prices of everything from milk to cars to real estate rise, the fixed amount of interest now has less purchasing power)

36
Q

e.r (exchange rate) risk

A

is an unavoidable risk of foreign investment

37
Q

premium

A

compensation for risk

38
Q

fisher equation

A

iₙ=iᵣ+INFL

iₙ= nominal interest rate
iᵣ=real interest rate
INFL=inflation premium

39
Q

downgrade risk

A

result when rating agencies lower their rating on a bond—for example, a change by Standard & Poor’s from a B to a CCC rating

40
Q

secondary market

A

when investors buy and sell bonds from other investors

41
Q

flight-to-quality

A

a financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments

42
Q

credit default swap

A

a financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of another investor

43
Q

tvm

A

time value of money

44
Q

pv

A

present value=intrinsic value

45
Q

discounting

A

process of converting future value to present values

46
Q

ordinary annuity

A

a series of equal payments made at the end of consecutive periods over a fixed length of time

47
Q

rrr

A

required rate of return the minimum amount of profit (return) an investor will seek or receive for assuming the risk of investing in a stock or another type of security

48
Q

wacc

A

the discount rate that should be used for cash flows with a risk that is similar to that of the overall firm

49
Q

fcf

A

Free cash flow is the cash flow available for the company to repay creditors or pay dividends and interest to investors

50
Q

convexity

A

a measure of the curvature in the relationship between bond prices and bond yields

51
Q

floater

A

A floater is a debt instrument whose interest rate is tied to a benchmark index such as LIBOR, which is known as its reference rate. A floater protects investors from rising interest rates because it allows them to reap the higher yields when the coupon rate is adjusted higher

52
Q

Vᵢբ=

(for example 7%=4%+3%
8%=5%+3%)

A

Vբᵢᵣ - Vբₗ

Vᵢբ=inverse floater
Vբᵢᵣ=fixed interest rate
Vբₗ=floater

53
Q

collateral

A

refers to an asset that a lender accepts as security for a loan,it acts as a form of protection for the lender.

54
Q

accrued interest

A

the amount of interest that has been incurred, as of a specific date, on a loan or other financial obligation but has not yet been paid out.

55
Q

dirty price

A

refers to the cost of a bond that includes accrued interest based on the coupon rate

56
Q

clean price

A

refers to the cost of a bond that not includes accrued interest based on the coupon rate

57
Q

present value formula

A

PV=FV/(1+i)n

PV=present value
FV= future value
r= rate of return
n= number of periods

58
Q

yield to call

A

a financial term that refers to the return a bondholder receives if the bond is held until the call date, which occurs sometime before it reaches maturity.

59
Q

yield to put

A

the effective annual rate of return a bond earns assuming it is held until the bond’s put date, not maturity, and is put (sold) to the issuer at a specific price (put price).

60
Q

yield to worst

A

is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting

61
Q

yield spread

A

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level.

62
Q

counterparty risk

A

is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation.

63
Q

sensitivity analysis

A

the study of how the uncertainty in the output of a mathematical model or system (numerical or otherwise) can be divided and allocated to different sources of uncertainty in its inputs.

64
Q

1 if coupon increases
2 if term increases
3 if ytm increases

A

1 volatility decreases
2 volatility increases
3 volatility decreases

65
Q

REPO

A

repurchase agreement is a form of short-term borrowing, mainly in government securities.

66
Q

sinking fund

A

is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense, or repayment of a long-term debt

67
Q

collateral trust bond

A

is a bond that is secured by one or more financial assets

Fixed-income Securities (1 decks)

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