Book 4_Fixed_READING 49_FIXED-INCOME INSTRUMENT FEATURES

Question 1

Basic features of a fixed income security

Answer 1

The issuer, maturity date, par value, coupon rate, coupon frequency, seniority, and contingency provisions.

Question 2

Issuers include

Answer 2

include corporations, governments, quasi-government entities, supranational entities and special purpose entities set up to issue asset-backed securities

Question 3

Bonds with original maturities of one year or less

Answer 3

are money market securities.

Question 4

Bonds with original maturities of more than one year

Answer 4

are capital market securities

Question 5

Bonds with no stated maturity

Answer 5

are perpetual bonds.

Question 6

Par value

Answer 6

the principal amount that will be repaid to bondholders, usually at maturity

Question 7

Coupon rate

Answer 7

• The percentage of par value that is paid annually as interest.
• Coupon frequency may be annual, semiannual, quarterly, or monthly.
• Zero-coupon bonds pay no coupon interest and are pure discount securities

Question 8

Senior debt

Answer 8

• ranks above junior (subordinated) debt if an issuer file for bankruptcy or undergo liquidation.
• Junior bonds with lower credit quality must offer investors higher yields to compensate for the greater probability of default.

Question 9

Contingency provisions

Answer 9

are rights to take actions in response to some potential future event, such as the right for the issuer to call the bond back earlier than maturity.

Question 10

Bond’s yield

Answer 10

• The return earned from investing in a bond
• For a fixed coupon bond, there is an inverse relationship between the price and the yield (return) of the instrument

Question 11

A yield curve

Answer 11

A plot of yield versus maturity for a certain issuer or class of bond

Question 12

inverted yield curve

Answer 12

A downward-sloping yield curve

Question 13

The source of repayment

Answer 13

• Sovereign bonds: the country’s taxing authority
• non-sovereign government bonds: the sources may be taxing authority or revenues from a project
• Corporate bonds: funds from the firm’s operations
• Securitized bonds: cash flows from a pool of financial assets.

Question 14

Bond secured or unsecured

Answer 14

• secured if they are backed by specific collateral or
• unsecured if they represent an overall claim against the issuer’s cash flows and assets

Question 15

A bond indenture

Answer 15

• a contract between a bond issuer and the bondholders which defines the bond’s features and the issuer’s obligations
• includes; entity issuing the bond, the source of funds for repayment, assets pledged as collateral, credit enhancements, and any covenants with which the issuer must comply

Question 16

Affirmative covenants and negative covenants

Answer 16

• Affirmative covenants specify actions an issuer must take,
• Negative covenants specify restrictions on the issue

Question 17

A cross-default clause

Answer 17

if the issuer defaults on any other debt obligation, the issuer will also be considered in default on this bond

Question 18

A pari passu clause

Answer 18

the bond will have the same priority of claims as the issuer’s other senior debt issues