Chapter 1

Question 1

What are the three important elements when investing in fixed-income securities?

Answer 1

1. Bond Features (issuer, maturity, par value, coupon rate, frequency and denomination)
2. legal, regulatory and tax considerations
3. contingency provisions (Rückstellungen, that may affect the bond’s scheduled cash flow)

Question 2

What kind of issuer do exist?

Answer 2

Question 3

IG bonds = investment-grade bonds
N-IG = non-investment-grade bonds

Until when is a bond an IG-Bond and up when is it a N-IG Bond?

Answer 3

it depends which rating organisation you’re looking at.

N-IG = high yield markets/ junk markets

Question 4

What is the tenor?

Answer 4

term to maturity = time remaining until the bond’s maturity date

Question 5

What’s the difference between money market securities and capital market securities?

Answer 5

money market securities < 1 year
capital market securities > 1 year

Question 6

What’s the par value?

Answer 6

the amount the issuer agrees to repay the bondholders on the maturity date

Question 7

What’s the coupon or nominal rate?

Answer 7

interest rate that the issuer agrees to pay each year until the maturity date.

Coupon can be paid quarterly, semi-annually or annually

Question 8

What’s the difference between:
- plain vanilla bonds
- floating-rate notes
- zero-coupons bonds?

Answer 8

plain vanilla bonds
- pay a fixed rate of interest

floating-rate notes (FRNs)
- a reference rate + spread

zero-coupons bonds:
- no interest rate

Question 9

What is a dual-currency bond?

Answer 9

coupon payments in one currency and pay the par value at maturity in another currency

Question 10

What is a currency option bond?

Answer 10

combination of a single currency bond + foreign currency option

Question 11

What kind of repayment structure do exist?

Answer 11

1. bullet structure
   -> all repaid at maturity date
2. sinking fund
   -> specifies the portion of the bond’s principal outstanding that must be repaid each year throughout the bond’s life or after a specifided date
3. partially amortized bond
   -> fixed periodic payment
   -> rest is repayed at the maturity date
4. amortizing bond
   -> periodic payments of interest
   -> repayment of principal

Question 12

How is a FRN-Coupon (Floating Rate Note) typically calculated? And what’s the typical period?

Answer 12

• quarterly
• reference rate + fixed spread = FRN Coupon

Question 13

Coupon payment structures:

What is a step-up coupon bonds?

Answer 13

• fixed or floating coupon, which increases by specified margins at specified dates
• offer bondholders protection against rising interest rates
• may be an important feature for callable bonds

Question 14

Coupon payment structures:

What is a Credit-linked coupon bonds?

Answer 14

• coupon that changes when the bond’s credit rating changes
• attractive to investors who are concerned about the future creditworthiness of the issuer

Question 15

Coupon payment structures:

What is a payment-in-kind bonds (PIK)?

Answer 15

• issuer is allowed to pay interest in form of additional amounts of the bond issue rather than a cash payment
• favored by issuers who are concerned that the issuers who are concerned that the issuer may face potential cash flow problems in the future

Question 16

Coupon payment structures:

What is a deferred coupon bonds?

Answer 16

• don’t pay a coupon in the first few years but then pay a higher coupon
• common in project financing

Question 17

Bonds with contingency provisions (Eventualität):
- Callable bonds
- putable bonds

Answer 17

Callable bonds:
- right to redeem all or partof the bond before the specified maturity date (zurück zu kaufen)
- reason: issuer want to protect themselves against a decline in interest rates

putable bonds (rare):
- bond holder has the right to sell the bond back to the issuer at a pre-determined price on specified dates
- beneficial for bondholder

Question 18

Why are call provisions spreads larger for bonds without credit ratings?

Answer 18

because of the information asymmetry

Question 19

Why are call provisions spreadshare larger for specultative credit ratings? (rather than bonds with IG credit ratings)

Answer 19

• higher leverage = greater risk-shifting problems
• higher call likelihood of N-IG bonds

Question 20

What is a convertible bond?

Answer 20

• hybrid with debt and equity features
• bondholder has the ability to switch bonds into equity (in case of shareprice appreciation and thus participate in the equity up side)
• at the same time: bondholder receives downside protection = if shareprice does not appreciate, comfort of regular coupons payment and repayment on maturity date

Question 21

conversion price vs. convertion ratio

Answer 21

conversion price
- price per share at which the convertible bond can be converted into shares

convertion ratio
- the number of common shares that each bond can be converted into

Question 22

How do you calculate the conversion value?

Answer 22

Current share price x conversion ratio = conversion value

Question 23

How do you calculate the conversion premium?

Answer 23

Convertible bond price - conversion value = conversion premium