Ch 3. Long Term Debt Products Flashcards
1
Q
Long term debt market: 2 segments:
A
- Fixed Interest Market (govvies and semis)
2. Debt capital markets (debt issued by non government issuers
2
Q
Government Securities
A
- CGS issued by AOFM on competitive tender basis & settled by RBA
- Tenders conducted on outright basis
- May also do conversions
3
Q
Annuity
A
- series of periodic cashflows that occur for a fixed period of time
- standard formula assumes the amount is $1 and is based on using the compound interest calculations
4
Q
RBA bond formula, broken into components:
A
Total Price = Capital price + accrued interest component
Accrued interest is the pro rata coupno received between coupon dates.
5
Q
FRN: 2 margins
A
1, Coupon margin: set at issue as a margin relative to an index
2. Trade margin: adjustment to the interest margin (plus or minus) to reflect the credit spread margin
6
Q
Zero Coupon bonds
A
- long term discount securities
- no interim cashflows, all interest and principal is paid on maturity
- therefore interest is large compared to face value, as such these are known as dep discount bonds
- taxed as an accrual rather than cash basis
7
Q
Capital Indexed Bonds
A
- periodic interest coupons are paid on an indexing principal.
- principal grows in line with movements in CPI
- fixed coupon rate of interest is applied to calculate coupon payments
- indexed principal itself is repaid at maturity
- provide inflation protection
8
Q
Interest Indexed bonds:
A
- interest payment has a fixedx rate comp;onent (coupon payment) and floating component which is added to the fixed coupon payment.
- The floating component varies with indexation adjustment
- principal is repaid at maturity at the original face value
9
Q
Medium Term Note
A
- Debt obligation of issuer
- issued in a series, each series may comprise 1 or more tranches issued on different dates
- subsequent series may be fungible
- fixed or floating
10
Q
Asset Backed Securities
A
- backed by asset pools and their respective cashflows that service interest payments on the debt issued
11
Q
ABS: securitisation process
A
- assets sold to special purpose vehiclew, which is a separate company specifically created for the transaction
- SPV is controlled by a trustee, which issues new securities backed by assets in the SPV
- A guarantee from a bank covering the SPV is often put in place to enhance marketability
- A manager is appointed to carry out administration functions
12
Q
MBS
- define
- bullet vs pass through
A
- most common form of ABS in Aus
- claim on cashflows from pools of mortgages
- bullet: repayment of all capital at maturity
- pass through: periodic payments of capital as the mortgaes are paid off (prepayment risk for investor)
13
Q
Hybrids - Reset Securities
A
- reset mechanism at predetermined date allowing issuer to change key terms (eg coupon / dividend rate, equity participation, next reset date)
- Holders have te right to accept new terms or refuse and exit.
- Exit - could convert into ordinary shares
14
Q
Hybrids: Convertible bonds
A
- Debt instruments with embedded options
- holder has right to convert to equity in the future, according to predetermined ratio
- most are callable (issuer can repurchase outstandings at certain price & date)
- equiv to bond with an equity call
15
Q
Hybrids: Warrants
A
- contain an option for the holder to convert the bond and receive redemption proceeds in another form.
- May be issued with a bond, from which they can be detached and exercised, or traded separately from the bond
