Bonds

Question 1

Corporate bond

Answer 1

Could default/ company

Question 2

Sovereign bond

Answer 2

Issued by the government- risk free

Question 3

Bond def

Answer 3

Long term debt security

Promises to pay interest- coupons and the principle

Question 4

Indenture

Answer 4

Agreement between borrowing company and company representing bond holders

Question 5

Collateral bond

Answer 5

Has an asset against it

Question 6

Debenture bond

Answer 6

Company agrees to repay and pay coupons- or risk loosing assets/ bankruptcy

Question 7

Call provision

Answer 7

Company can repurchase/ call entire back at a set price e.g face value- difference=call premium

Question 8

Restrictive covenant

Answer 8

Stop companies purposely defaulting

Question 9

Positive restrictive covenants

Answer 9

Must maintain working capital above certain level

Provide statements to lenders

Question 10

Negative restrictive covenant

Answer 10

Restriction on issueijf further debt

Question 11

Bond ratings and who

Answer 11

Moody

Aaa- highest quality, low chance of defaulting

Question 12

Issues with credit ratings- and ref

Answer 12

Bolton at al, 2009
Issuers payments were influencing ratings- paid moody to rate before bond launched
Barriers to entry- needed good reputation for moody to date

Question 13

Controversy of credit ratings and example

Answer 13

Enron bankruptcy- none of 2 major credit ratings adjusted investment grade rating until 5 days before bankruptcy

Question 14

Junk bond

Answer 14

Below bb

Low grade

Question 15

Why junk bonds are controversial

Answer 15

Can issue more junk bonds than high grade- used to finance mergers which couldn’t traditionally be done- increased leverage and loss of jobs

Question 16

Floating rate bonds

Answer 16

Coupon payments are variable- in line with interest rate index
Popularity depends on interest rates

Question 17

Income bonds

Answer 17

Paid based on firms income- only if good enough- signals financial distress

Question 18

Private bond types and lengths

Answer 18

Loans- 1-15 years

private placements- long maturity

Question 19

Benefits of private bonds vs public

Answer 19

Easier to re negotiate after default
Don’t have to register with Sec
Cost less to distribute

Question 20

CDS stands for

Answer 20

Credit default swap

Question 21

Credit default swap

Answer 21

Insurance contracts to cover losses e.g bonds defaulting

Question 22

Problems with cds’s

Answer 22

No regulation

Over inflated wealth/default

Question 23

Cdo

Answer 23

Collaterised debt obligations

Question 24

Collaterised debt obligations

Answer 24

Portfolio of assets sold in levels- senior, mezzanine, equity

Question 25

Problems with cdo

Answer 25

Ratings questionable

Equity- very risky if company goes bankrupt- last in line for remaining assets

Question 26

Bond price equation

Answer 26

Sum of coupons discounted at number of years + par value/discount of year

Sum (C/(1+r)^t) + par value/(1+r)^t