Ch 7 - Debt Securities

Question 1

from the highest creditor security to the lowest, liabilities are ranked in the following order:

Answer 1

1. First mortgage and ABS
2. Secured debt
3. Unsecured debentures
4. Capital securities
5. Preferred shares
6. Common shares

Question 2

Canadian money market securities commonly appear in three forms

Answer 2

• Treasury bill
• bankers’ acceptance
• commercial paper.

Question 3

Difference between Bonds and Debentures

Answer 3

Debentures are unsecured by specific assets and have only a residual claim on an issuer’s assets in the event of bankruptcy

Question 4

Define Capital Securities

Answer 4

• Subordinated debentures that allow the issuer to add to its capital base
• Can defer interest payments if it encounters financial hardships.

Question 5

Define Issuer extendible notes

Answer 5

• Obligations with embedded call options that an issuer owns that allow it to pay off the bond or extend the maturity.
• yield is higher than conventional bonds of similar maturity.

Question 6

modified duration is a measure of

Answer 6

the approximate percentage price change for every 100 basis point change in yield.

Question 7

5 Characteristics between Bonds and Duration

Answer 7

1. A bond with no coupon payments, such as a strip coupon, will have a Macaulay duration equal to its term to maturity.
2. Modified duration is always less than the term to maturity.
3. The lower the coupon rate, the greater the modified duration.
4. The longer the term to maturity, the greater the modified duration.
5. The lower the yield, the greater the modified duration.

Question 8

Define Convexity

Answer 8

A measure of how much a bond’s price/yield curve deviates from the linear approximation of that curve.

Question 9

Credit risk appears in three forms

Answer 9

1. Default risk
2. Credit downgrade risk
3. Credit spread risk

Question 10

what is is Credit Spread Risk?

Answer 10

the risk that the spread relative to a benchmark bond will increase.

Question 11

Credit analysis comprises ( 3 points)

Answer 11

1• Determining the issuer’s existing obligations and the assets that are available as protection for debtholders in
the event of a default.
2• Analyzing liquidity and borrowing needs.
3• Analyzing cash flow needs.

Question 12

Yield Curve can move in 2 ways

Answer 12

1- Parallel

2- Twist

Question 13

Describe a Yield Curve Twist

Answer 13

One end of the yield curve moves more than the other end, or in the opposite direction.

Question 14

what is Macaulay Duration?

Answer 14

the weighted average term to maturity of the present value of a bond’s interest and principal payments.

Question 15

4 Shapes of the Yield Curve

Answer 15

1. Upward sloping
2. Inverted
3. Flat
4. Humped