Chapter 20 Flashcards
It is a commercial draft (a written instruction to make payment) drawn by a borrower for payment on a specified date.
Bankers’ acceptance
These non-government debt securities are backed by a pool of financial assets.
asset-backed securities
Evaluating an issuer’s ability to make timely payments is known as this.
credit analysis
It is an unsecured promissory note issued by a corporation or backed by a pool of underlying financial assets in asset-backed security form.
commercial paper
The most common option on a debt security whereby the borrower has the right to buy back the issue at specified times before the final maturity date.
call feature
It simply represents the rating agency’s opinion of the creditworthiness of an issuer with respect to its debt securities or other financial obligations.
credit rating
These are the shortest-term marketable debt instrument issued by governments.
treasury bills
With this type of yield curve, short-term interest rates are exactly or very close to longer-term rates.
flat yield curve
These issues are not traded as frequently as the benchmarks and are therefore less liquid.
off-the-run
It is an approximate measure of the annual return on the security if it is held to maturity
yield to maturity
With this type of yield curve, short-term interest rates are lower than longer-term interest rates.
normal yield curve
These instruments are known as benchmarks and are the more liquid issues.
on-the-run
For RRBs issued by the Government of Canada, the cumulative level of inflation is known as this.
inflation compensation
The additional yield that a debt security should provide above a government-issued security.
spread
The risk that an issuer may default on interest or principal payments (or both) is often referred to as this.
credit risk or Default risk
With this type of yield curve, short-term interest rates are greater than longer-term rates.
inverted yield curve
This option allows the issuer of a corporate bond to call a bond at a price based on the greater of two
amounts:
• Face value
• A price based on the yield of an equivalent-term Government of Canada bond plus a specified yield
spread
The Canadian yield call
Corporate liabilities are normally ranked in the
following order based on which liabilities are repaid:
- First mortgage liabilities and asset-backed securities
- Secured debt
- Unsecured debentures
- Preferred shares
- Common Shares
under Canadian tax rules, the return on a strip bond is treated as
regular interest income, not as a capital gain.
Although no interest is paid until maturity, the investor must include as income the notional interest that
accrues each year, up to the bond’s anniversary date.
Bonds that are indexed to inflation
Real Return Bonds (RRBs)
represents the percentage of the original principal remaining in the mortgage pool after the current month’s payments.
Pool Factor
There are four different NHA MBS pool categories available to investors:
• Exclusive homeowner
• Multi-family
• Social housing (such as co-ops and seniors’ residences)
• Mixed (a combination of any of the above)
Furthermore, there are two NHA MBS types, as described below:
Open NHA MBS- The mortgages in an open NHA MBS pool contain clauses that permit the mortgagor (borrowers) to make early principal prepayments in addition to the regularly scheduled principal and interest payments. An open MBS, therefore, carries some uncertainty in that principal prepayments would alter the monthly cash flow stream.
Closed NHA MBS- The mortgages in a closed NHA MBS pool do not permit the mortgagors to make early principal prepayments. The monthly payments from a closed NHA MBS are therefore predictable and consistent.
When based on pools of commercial mortgages, an MBS is known as a
commercial mortgage-backed security
(CMBS)
Are debt instruments for which the issuer has the right at certain points (normally the anniversary date of issue) either to allow the bond to mature or to extend the maturity.
Issuer extendible notes
This shift in the yield curve occurs when yields at all maturities move up or down by the same, or nearly the same, amount.
Parallel shift
This shift in the yield curve occurs when yields toward one end of the yield curve move up or down by more than yields at the other end
Twist
This shift in the yield curve occurs when the yield at a certain maturity moves up or down independently or in a greater amount than yields at all other maturities.
Hump
Long term, Low Coupons
Short term, High Coupons have
Have higher interest rate risk
Lower risk
Most yield curve shifts are either
parallel or twists
Humps are rare
