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Investment Practice > Debt: Types and Features > Flashcards

Debt: Types and Features Flashcards

1
Q

order of repayment

A

Creditors:
1. liquidator
2. fixed charge holders
3. preferential creditors
4. floating charge holders
5. unsecured creditors
6. subordinated loan stock
Owners:
7. preference shareholders (NV excludes participating shares)
8. ordinary shareholders
9. deferred shareholders
10. warrants

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2
Q

uk government index linked securities

A

> coupon and capital are related to the RPI.
market price is fixed by supply and demand.

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3
Q

primary reason for investing in strips

A

Strips allow fund managers to match the timings of cash flows to their liabilities

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4
Q

call provision

A

gives the company the right to BUY bonds back: i.e. the right to redeem

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5
Q

put provision

A

allows the holder to force the issuer of bonds to redeem them early: i.e. the investor can SELL them back early

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6
Q

mechanism by which losses are absorbed

A

> Converting debt to equity
writing down the principal owed

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7
Q

COCO’s triggers

A

mechanical trigger - bank’s capital ratio below certain level
discretionary trigger - regulator’s opinion on bank solvency

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8
Q

foating rates gilts pay

A

quarterly coupons

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9
Q

conventional gilts have fixed coupon and redemption dates

A

shorts <7y
medium 7-15y
long >15y

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10
Q

non-conventional irredemable bonds

A

1966 aft
redeemed in 1966 and afterr
redeemed at gvmnts discretion

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11
Q

index linked bonds

A

coupons and redemptions linked to UK Retail price index
> 3 motnhs prior to payment
> for index linked gilt issued before Sept 2005 the RPI is 8 mnths

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12
Q

double dated gilts

A

categorised by their second date

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13
Q

convertible gitls

A

converted to ore-defined amounts of a gilt
> short - to medium bonds converted to long

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14
Q

floating rate gilts

A

variable coupon
coupon is set by a market interest rate at beginning of each interest payment
pay quarterly coupon
trade near par

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15
Q

STRIPS market

A

GEMMs
Treasury
BoE
if GEMMs MM then on strips market participants list
coupons redeemed on 7 June to 7 December

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16
Q

gilt repo

A

party sells gilts and then repurchases it at an agreed price and date
reverse repo (opposite)
repoer wants to enhance liquidity
reverse repo to cover short position

17
Q

term repos

A

maturity dates in excess of overnight

18
Q

open repo

A

no fixed time of repurchase

19
Q

interest on corporate debt

A

fixed or variable

20
Q

indenture

A

bonds terms and conditions

21
Q

sinking funds

A

enable issuer to repay part of nominal value each year prior to redemption

22
Q

protective covenants

A

designed to protect cash flows from undue risk
limitations:
> profit distributed as dividends
> debt raised and ranking of debt
> director remuneration

23
Q

convertibility

A

bond converted into a number o equities
> low risk way for equity price increase

24
Q

secured debt securities: floating charge (debentures) and fixed charge (mortgage bonds)

A

bond floating charge over assets secured against an asset CLASS
fixed charge over assets secured against a specific firm asset

25
Q

loan stock

A

unsecured corporate debt securities
lenders have no legal charge over the firm’s assets

26
Q

CDO

A

security secured by the cash flows of bonds, loans and other assets
e,g, for SPV
issuer different to legal owner to protect against bankruptcy risk of original owner

27
Q

synthetic CDO

A

no physical transfer of bonds or loans from credit institution to SPV
sell credit default swap to credit institution
secured by premiums

28
Q

floating rate notes

A

> coupon paid quarterly or semi-annually
floats in line with market rates
market rates assessed agianst benchmark and a margin is added
corporate bond riskier than governemnt
value of bond = par

29
Q

eurobonds

A

bearer bonds
immobilisation (safekeeping Euroclear or Clearstream)
> fixed or floating paid annualy
> interest gross of witholding tax

30
Q

theoretical price of a convertible corporate bond

A

compare a similar straight bonds and an American call option with the same strike and expiry date

Price = straight bond + ((Option premium/1+Dilution) * Conversion ratio)

31
Q

conversion value and price

A

value = current share price x conversion ratio
price = normal value of convertible / conversion ratio

32
Q

CoCos

A

converted into shares automatically if a pre-specified condition is met

33
Q

conventional bond

A

shorts < medium dated
mediums 5-15 yrs (LSE), 7-15 (DMO)
longs > 15 yrs

34
Q

parties allowed to strip

A

GEMM
BoE
majesty’s treasury

35
Q

corporate bonds

A
  1. secured debt securities (fixed charge, floating charge over assets)
  2. loan stock ( unsecured )
36
Q

sinking fund provisions

A

enables the issuer to pay off some capital each year

37
Q

protective covenants

A

protects income streams for bond holders

38
Q

convertible provisions

A

shows the terms of conversion to equity

Investment Practice (17 decks)

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