Chapter 3 - Specialist asset classes (1) Flashcards

1
Q

LIBOR

A

London Interbank Offered Rate

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2
Q

Treasury Bills

A

Money market instruments issued by the government

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3
Q

Commercial paper

A

Short-term unsecured debt issued by a company

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4
Q

Repos

A

Agreement whereby one party sells stock to another party with a simultaneous agreement to repurchase it at a later date at an agreed price

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5
Q

Government agency securities

A

Securities issued by near-government institutions that are almost as risk-free and liquid as Treasury bill and government bonds

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6
Q

Bank time deposit

A

A bank deposit that has a specified term

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7
Q

Evergreen credit

A

Permission to borrow up to a specified limit, with no fixed maturity

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8
Q

Revolving credit

A

Permission to borrow up to a specified limit, with a fixed maturity of up to 3 years

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9
Q

Primary reasons for higher yield on corporate bond (compared to government bond)

A
  • Increased default risk

- Liquidity/Marketability risk

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10
Q

Credit derivatives

A

Contracts where the payoff depends partly on the credit-worthiness of one (or more) commercial (or sovereign) bond issuers

Two most common types:

  • Credit default swaps (CDS)
  • Credit spread options
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11
Q

Credit default swap

A

A contract that provides a payoff if a particular credit event occurs eg.

  • Bankruptcy
  • A ratings downgrade
  • Cross-default
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12
Q

Two way of settlement of a CDS

A
  • A pure cash payment

- Physical settlement whereby both a security and cash are exchanged

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13
Q

Credit-linked note

A

Consists of a basic security plus an embedded CDS

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14
Q

Credit spread option

A

An option on the spread of the yields earned on two assets

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15
Q

Interest rate swaps

A

One party, Company A, agrees to pay another party, Company B, cashflows equal to interest at a predetermined fixed rate on a notional amount for a number of years.

At the same time, Company B agrees to pay Company A cashflows equal to interest at a floating rate on a notional amount for the same period of time.

The swap has the effect of changing the nature of an asset/liability from fixed(floating) to floating(fixed)

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16
Q

Step-up swaps

A

A swap where the principal amount increases in a predetermined way

17
Q

Amortising swap

A

A swap where the principal reduces in a predetermined way

18
Q

Total return swap

A

A swap wherein the receiver receives the total return on a reference asset in return for paying the reference floating rate with an adjustment

19
Q

RPI and LPI swaps

A

RPI swap: A swap where one set of payments is linked to the level of the retail price index (RPI)

LPI swap: Same as above but capped at a maximum rate

20
Q

Swaption

A

An option on swaps (swaption) provides one party with the right to enter into a certain swap at a certain time in the future