Debt Instruments

Question 1

3 yield curve theories

Answer 1

1. Pure expectations
2. Liquidity preference / risk premium
3. Preferred habitat

Question 2

3 securitized / tradeable MMI

Answer 2

1. Government bills/ Treasury bills
2. Commercial Papers
3. Certificate of deposit

Question 3

Government bills / US Treasury bills

Answer 3

1. securitized = tradable
2. at Discount = no coupon
3. yield = par value - price paid

Question 4

Commercial papers CP

Answer 4

1. securitized = tradable
2. unsecured = uncollaterized
3. issued by financial/ non-financial companies
4. short-term
5. bridge financing
6. at discount
   7 . No coupon

Question 5

Certificate of deposit CD

Answer 5

1. securitized = tradable
2. issued by bank
3. unsecured = uncollaterlized
4. no coupon» principal amount + interest at maturity ( like savings account)
5. represents an underlying (time/term) deposit placed with the bank
6. 1month to 5years

Question 6

4 Non-securitized / non-tradable MMI

Answer 6

1. Call deposits
2. Overnight deposits
3. Time or fixed term deposits
4. Fiduciary deposits

Question 7

Call deposits

Answer 7

1. no fixed maturity
2. almost no notice / for big withdrawals 24 h prior
3. non-tradable
4. current/checking account = type of call deposit

Question 8

Overnight deposits

Answer 8

1. deposit for 1 day
2. shortest maturity
3. non-tradable

Question 9

Time or fixed term deposit

Answer 9

1. non-tradable
2. by bank
3. specific maturity date
4. only predefined periods ( 1,3,6 months)

Question 10

Fiduciary deposits

Answer 10

1. non-tradable
2. deposits held at other banks to obtain preferential rates for clients
3. U acts in the best interests of the client»> fiduciary
4. no withholding tax on interest

Question 11

High yield bonds

Answer 11

Junk bonds
High yield = high risk
Illiquid
Equity like risk

Question 12

Callable bonds

Answer 12

Callable = right to buy
When market interest rates fall»issuer will call back to reissue at lower coupon
» higher coupon to compensate

Question 13

Puttable bond

Answer 13

Puttable = right to sell
When market interest rates rise»holder will put = sell the bond back to issuer and reinvest at higher coupon rate
That’s why investors will be paid lower coupon

Question 14

Contingent covertible (CoCo bonds)

Answer 14

Dependent on a specific event( such as the stock price of a company exceeding a particular level) the Bonds will be converted to EQUITY

1. issued by Banks for Basel capital adequacy ( to restore capital ratios» CoCo mandatorily converted to equity/ written down permanently)&raquo_space;>SHOCK BOOST
2. that’s why investors have higher risk&raquo_space;higher yoeld
3. quick BOOST of capital
4. Buy time for Banks to find solutions

Question 15

Dirty price

Answer 15

1. Dirty price = Clean price + accrued interest
2. Dirty price = actual price that the buyer pays
3. notmally quoted in clean price

Question 16

Price of Bonds ( 3 components)

Answer 16

1. Cash flows
2. Required return = yield
3. Present value

Question 17

Higher yield

Answer 17

Lower present value

Question 18

Lower yield

Answer 18

Higher present value

Question 19

Inverse relationship between YIELD and BOND PRICE

Answer 19

C > Y > PAR = e.g 96%
C= Y= PAR = e.g. 100%
C< Y< PAR = e.g. 107%

Question 20

YTM smaller than coupon

Answer 20

Price higher than Par

Question 21

YTM higher than coupon

Answer 21

Price lower than Par