Chapter 1

Question 1

What is a fixed-income security?

Answer 1

A fixed-income security is a financial obligation of an entity (the issuer) that promises to pay a specified sum of money at specified future dates.

Question 2

What are the 3 elements when investing in fixed-income securities?

Answer 2

• The bond features, including the issuer, maturity, par value, coupon rate and frequency and currency denomination.
• The legal, regulatory and tax considerations.
• The contingency provisions that may affect the bond’s scheduled cash flows.

Question 3

Types of creditworthiness

Answer 3

Investment grade and non-investment-grade

Question 4

Types of Issuers

Answer 4

• Supranational organisation
• sovereign government
• non-sovereign government
• quasi-government entity
• company

Question 5

How long are maturities for money-market and capital market securities?

Answer 5

up to on year and longer than one year respectively.

Question 6

What is the maturity

Answer 6

The maturity date is the date when the issuer is obligated to redeem the bond
The tenor, also known as term to maturity, is the time remaining until the bond’s maturity date.

Question 7

What is the par value

Answer 7

The par value of a bond is the amount the issuer agrees to repay the bondholders on the maturity date.

Question 8

What are Dual Currency Bonds?

Answer 8

Bonds that make coupon payments in one currency and pay the par value at maturity in another currency.

Question 9

What are currency option bonds?

Answer 9

Bonds that are a combination of a single currency bonds plus a foreign currency option. - Choose currency to be paid

Question 10

What is a trust deed?

Answer 10

The trust deed is the legal contract that describes the form of the band, the obligations of the issuer, and the rights of the bondholders.

Question 11

What is the bond indenture?

Answer 11

The indenture is written in the name of the issuer and references features of the bond issue, such as par value, coupon rate and frequency, maturity date, and the funding sources for the interest and principal repayments, as well as any collaterals, covenants and credit enhancements.

Question 12

Collateral bonds

Answer 12

Refer to the act of borrowing money with the borrower offering an asset or a property as a security measure for the lender. If the borrower fails to pay the debt interests or principal on time, the lender acquires the asset or property that the borrower put up as collateral.

Question 13

Credit enhancements

Answer 13

Provisions that may be used to reduce the credit risk of a bond issue.

Question 14

Covenants

Answer 14

Clauses that specify actions that the issuer is obligated to perform or prohibited from performing.
Affirmative and negative

Question 15

Sovereign Bonds sources of repayment proceeds

Answer 15

Backed by “Full faith and credit” of national government, government’s ability to raise tax revenues and print money.

Question 16

Non-Sovereign Bonds sources of repayment proceeds

Answer 16

general taxing authority, the cash flow of the project the bond issue is financing, special taxes and fees established specifically for the purpose of funding the payments of interest and principal.

Question 17

Types of credit enhancement

Answer 17

Internal - subordination: ordering of claim priority

overcollateralisation: posting more collateral than is needed to obtain financing

Question 18

What is the Eurobond market?

Answer 18

Primarily created to bypass the legal, regulatory and tax constraints imposed on bond issuers and investors, particularly in the United states. Less regulated than domestic and foreign bonds because they are issued outside the jurisdiction of any single country. Bearer bonds.

Question 19

What is a global bond?

Answer 19

Issued simultaneously in the eurobond market and in at least one domestic bond market

Question 20

What types of principal repayment structures are there?

Answer 20

• Bullet
• Amortising Bond
• Partially Amortised Bond
• Sinking Fund Arrangement

Question 21

What kind of repayment does a bullet structured bond have?

Answer 21

A bullet structure has all the principal repaid at the maturity date.

Question 22

What kind of repayment does a sinking fund arrangement have?

Answer 22

A sinking fund arrangement specifies the portion of the bond’s principal outstanding (e.g., 5%) that must be repaid each year throughout the bond’s life or after a specified date.

Question 23

What kind of repayment does an amortising bond have?

Answer 23

An amortizing bond has a payment schedule that calls for periodic payments of interest and repayments of principal.

Question 24

What kind of repayment does a partially amortised bond have?

Answer 24

A partially amortized bond also makes fixed periodic payments until maturity, but only a portion of the principal (called a “balloon payment”) is repaid by the maturity date.

Question 25

What types of coupon payment structures are there?

Answer 25

• floating-rate notes
• step-up coupon bonds
• credit-linked coupon bonds
• payment-in-kind coupon bonds
• deferred coupon bonds
• index-linked bonds

Question 26

Step-up coupon bonds

Answer 26

have a fixed or floating coupon, which increases by specified margins at specified dates.

Offer bondholders some protection against rising interest rates and may be an important feature for callable bonds.

Question 27

Credit-linked coupon bonds

Answer 27

have a coupon that changes when the bond’s credit rating changes.

Are attractive to investors who are concerned about the future creditworthiness of the issuer.

Question 28

Payment-in-kind (PIK) bonds

Answer 28

Typically allow the issuer to pay interest in the form of additional amounts of the bond issue rather than a cash payment.

Typically are favored by issuers who are concerned that the issuer may face potential cash flow problems in the future.

Question 29

Deferred coupon (i.e., split coupon) bonds

Answer 29

pay no coupon for the first few years but then pay a higher coupon than they otherwise normally would for
the remainder of their life.

are also common in project financing when the assets being developed do not generate any income during
the development phase.

Question 30

Index-linked bonds

Answer 30

have their coupon payments and/or principal repayment linked to a specified index

• Bonds can potentially be linked to any published economic and financial variable/index.
• Bonds linked to a rate of inflation are called “inflation-linked bonds” (e.g., Treasury inflation-protected
  securities, or TIPS, in the United States.

Question 31

Equity-Linked note

Answer 31

• An equity-linked note (ELN) is a fixed-income security that differs from a conventional bond in that the final payment is based on the return of an
equity index.

Question 32

What is a contingency provision

Answer 32

a clause in a legal document that allows for some action if the event or circumstance does occur (i.e., embedded option).

Question 33

Callable bonds

Answer 33

Callable bonds give the issuer the right to redeem
all or part of the bond before the specified maturity
date.
• The primary reason why issuers choose to issue
callable bonds rather than non-callable bonds is to
protect themselves against a decline in interest
rates, or issuer’s credit quality improving.

Question 34

Putable bonds

Answer 34

• The bondholder has the right to sell the bond
back to the issuer at a pre-determined price on
specified dates.
• Putable bonds are beneficial for the bondholder by
guaranteeing a pre-specified selling price at the
redemption dates.

Question 35

Convertible bonds

Answer 35

They are a hybrid security with both debt and
equity features.
• The bondholder has the right to exchange the
bond for a specified number of common shares
in the issuing company.
• They are beneficial to bondholders.
• The bondholder has the ability to convert bonds
into equity in case of share price appreciation
and thus participate in the equity up side.
• At the same time, the bondholder receives
downside protection; if the share price does not
appreciate, the convertible bond offers the
comfort of regular coupon payments and the
promise of principal repayment at maturity.