Book 4_Fixed_READING 50_FIXED-INCOME CASH FLOWS AND TYPES

Question 1

A bond with a bullet structure

Answer 1

pays coupon interest periodically and repays the entire principal value at maturity, along with the final coupon interest payment.

Question 2

A bond with an amortizing structure

Answer 2

• Repays part of its principal at each payment date
• A fully amortizing structure makes equal payments throughout the bond’s life.
• A partially amortizing structure has a BALLOON payment at maturity, which repays the remaining principal as a lump sum

Question 3

Balloon payment at maturity

Answer 3

a part of principal pay at the maturiry, and the remaining pay as full amortizing structure

Question 4

A sinking fund provision

Answer 4

requires the issuer to retire a portion of a bond issue at specified times during the bond’s life

Question 5

waterfall structures

Answer 5

• are used to establish principal repayments to holders of ABSs and MBSs
• These structured products can be split into tranches of varying seniority

Question 6

Floating-rate notes (FRN)

Answer 6

have coupon rates that adjust based on a variable market reference rate (MRR), plus some basic point

Question 7

In an issue with a term maturity structure

Answer 7

all the bonds are scheduled to mature on the same date

Question 8

Other coupon structures include

Answer 8

• step-up coupon notes: coupon rate increase overtime
• credit-linked coupon bonds: rate increase if credit decrease
• payment-in-kind bonds: increase coupon by increase principal
• deferred coupon bonds: coupon payments do not begin until a specified time after issuance
• and index-linked bonds: coupon link to specific index (Inflation-linked bonds)
• Zero-coupon bonds: paid both coupon and principal one time at maturity

Question 9

A contingency provision in a contract

Answer 9

describes an action that may be taken if an event (the contingency) actually occurs

Question 10

Callable bonds

Answer 10

allow the issuer to redeem bonds at a specified call price
- A call option has value to the issuer because it gives the issuer the right to redeem the bond early and issue a new bond (borrow) if the market yield on the bond declines

Question 11

Putable bonds

Answer 11

allow the bondholder to sell bonds back to the issuer at a specified put price.
- Bondholders are likely to exercise such a put option when the price of the bond is less than the put price because interest rates have risen or the credit quality of the issuer has fallen.

Question 12

Legal and regulatory matters

Answer 12

that affect fixed-income securities vary by the places where they are issued and traded, and the location of the issuing entities.

Question 13

Domestic bonds

Answer 13

trade in the issuer’s home country and currency

Question 14

Foreign bonds

Answer 14

are from foreign issuers but denominated in the currency of the country where they trade

Question 15

Eurobonds

Answer 15

are issued outside the jurisdiction of any single country and can be issued in any currency

Question 16

Global bonds

Answer 16

are traded in the Eurobond market and at least one domestic market

Question 17

Interest income

Answer 17

• is typically taxed at the same rate as ordinary income, while gains or losses from selling a bond are taxed at the capital gains tax rate
• However, the increase in value toward par of original issue discount bonds is considered interest income

Question 18

In the United States, interest income from municipal bonds

Answer 18

is usually tax exempt at the national level and in the issuer’s state.