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Fixed Income Securities > Defining Elements > Flashcards

Defining Elements Flashcards

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SIE Exam flashcards
1
Q

Add-on rates

A

Bank certificates of deposit, repos, and indexes such as Libor and Euribor are quoted on an add-on rate basis (bond equivalent yield basis).

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2
Q

Agency bond

A

Quasi-government bondA bond issued by an entity that is either owned or sponsored by a national government. Also calledagency bond.

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3
Q

Agency costs

A

Costs associated with the conflict of interest present between principals and agents when a company is managed by non-owners. Agency costs result from the inherent conflicts of interest between managers, bondholders, and equity owners.

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4
Q

Agency costs of debt

A

Costs arising from conflicts of interest between managers and debtholders.

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5
Q

Agency costs of equity

A

The smaller the stake managers have in the company, the less their share in bearing the cost of excessive perquisite consumption—consequently, the less their desire to give their best efforts in running the company.

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6
Q

Agency RMBS

A

In the United States, securities backed by residential mortgage loans and guaranteed by a federal agency or guaranteed by either of the two GSEs (Fannie Mae and Freddie Mac).

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7
Q

Asset-backed securities

A

A type of bond issued by a legal entity called aspecial purpose entity(SPE) on a collection of assets that the SPE owns. Also, securities backed by receivables and loans other than mortgages.

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8
Q

Asset-based valuation models

A

Valuation based on estimates of the market value of a company’s assets.

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9
Q

Asset class

A

A group of assets that have similar characteristics, attributes, and risk–return relationships.

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10
Q

Asset swap

A

Converts the periodic fixed coupon of a specific bond to an MRR plus or minus a spread.

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11
Q

Auction

A

A type of bond issuing mechanism often used for sovereign bonds that involves bidding.

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12
Q

Average life

A

Weighted average lifeA measure that gives investors an indication of how long they can expect to hold the MBS before it is paid off; the convention-based average time to receipt of all principal repayments. Also calledaverage life.

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13
Q

Backup line of credit

A

A type of credit enhancement provided by a bank to an issuer of commercial paper to ensure that the issuer will have access to sufficient liquidity to repay maturing commercial paper if issuing new paper is not a viable option.

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14
Q

Backwardation

A

A condition in the futures markets in which the spot price exceeds the futures price, the forward curve is downward sloping, and the convenience yield is high.

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15
Q

Balloon payment

A

Large payment required at maturity to retire a bond’s outstanding principal amount.

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16
Q

Basis point

A

Used in stating yield spreads, one basis point equals one-hundredth of a percentage point, or 0.01%.

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17
Q

Bearer bonds

A

Bonds for which ownership is not recorded; only the clearing system knows who the bond owner is.

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18
Q

Benchmark

A

A comparison portfolio; a point of reference or comparison.

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19
Q

Benchmark issue

A

The latest sovereign bond issue for a given maturity. It serves as a benchmark against which to compare bonds that have the same features but that are issued by another type of issuer.

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20
Q

Benchmark rate

A

Typically the yield-to-maturity on a government bond having the same or close to the same time-to-maturity.

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21
Q

Benchmark spread

A

The yield spread over a specific benchmark, usually measured in basis points.

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22
Q

Bilateral loan

A

A loan from a single lender to a single borrower.

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23
Q

Bond

A

Contractual agreement between the issuer and the bondholders.

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24
Q

Bond equivalent yield

A

A calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.

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25
Q

Bond indenture

A

The governing legal credit agreement, typically incorporated by reference in the prospectus. Also calledtrust deed.

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26
Q

Bond yield plus risk premium approach

A

An estimate of the cost of common equity that is produced by summing the before-tax cost of debt and a risk premium that captures the additional yield on a company’s stock relative to its bonds. The additional yield is often estimated using historical spreads between bond yields and stock yields.

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27
Q

Bridge financing

A

Interim financing that provides funds until permanent financing can be arranged.

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28
Q

Bullet bond

A

Bond in which the principal repayment is made entirely at maturity.

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29
Q

Cap rate

A

A metric by which real estate managers are often judged; the annual rent actually earned (net of any vacancies) divided by the price originally paid for the property.

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30
Q

Capacity

A

The ability of the borrower to make its debt payments on time.

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31
Q

Character

A

The quality of a debt issuer’s management.

32
Q

Collateral

A

Assets or financial guarantees underlying a debt obligation that are above and beyond the issuer’s promise to pay.

33
Q

Collateral manager

A

Buys and sells debt obligations for and from the CDO’s portfolio of assets (i.e., the collateral) to generate sufficient cash flows to meet the obligations to the CDO bondholders.

34
Q

Collateral trust bonds

A

Bonds secured by securities, such as common shares, other bonds, or other financial assets.

35
Q

Collateralized bond obligations

A

A structured asset-backed security that is collateralized by a pool of bonds.

36
Q

Collateralized debt obligation

A

Generic term used to describe a security backed by a diversified pool of one or more debt obligations.

37
Q

Collateralized loan obligations

A

A structured asset-backed security that is collateralized by a pool of loans.

38
Q

Collateralized mortgage obligation

A

A security created through the securitization of a pool of mortgage-related products (mortgage pass-through securities or pools of loans).

39
Q

Conditional pass-through covered bonds

A

Covered bonds that convert to pass-through securities after the original maturity date if all bond payments have not yet been made and the sponsor is in default.

40
Q

Constant-yield price trajectory

A

A graph that illustrates the change in the price of a fixed-income bond over time assuming no change in yield-to-maturity. The trajectory shows the “pull to par” effect on the price of a bond trading at a premium or a discount to par value.

41
Q

Contingent convertible bonds

A

Bonds that automatically convert into equity if a specific event or circumstance occurs, such as the issuer’s equity capital falling below the minimum requirement set by the regulators. Also calledCoCos.

42
Q

Contract rate

A

Mortgage rate The interest rate on a mortgage loan; also calledcontract rateornote rate.

43
Q

Convenience yield

A

A non-monetary advantage of holding an asset.

44
Q

Conventional bond

A

Plain vanilla bondBond that makes periodic, fixed coupon payments during the bond’s life and a lump-sum payment of principal at maturity. Also calledconventional bond.

45
Q

Conventional cash flows

A

A conventional cash flow pattern is one with an initial outflow followed by a series of inflows.

46
Q

Convergence

A

The tendency for differences in output per capita across countries to diminish over time. In technical analysis, the term describes the case when an indicator moves in the same manner as the security being analyzed.

47
Q

Conversion premium

A

The difference between the convertible bond’s price and its conversion value.

48
Q

Conversion price

A

For a convertible bond, the price per share at which the bond can be converted into shares.

49
Q

Conversion ratio

A

For a convertible bond, the number of common shares that each bond can be converted into.

50
Q

Conversion value

A

For a convertible bond, the current share price multiplied by the conversion ratio.

51
Q

Convertible bond

A

Bond that gives the bondholder the right to exchange the bond for a specified number of common shares in the issuing company.

52
Q

Convertible preference shares

A

A type of equity security that entitles shareholders to convert their shares into a specified number of common shares.

53
Q

Convexity adjustment

A

For a bond, one half of the annual or approximate convexity statistic multiplied by the change in the yield-to-maturity squared.

54
Q

Cost averaging

A

The periodic investment of a fixed amount of money.

55
Q

Coupon rate

A

The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.

56
Q

Covenants

A

The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to perform (affirmative covenant) or prohibited from performing (negative covenant).

57
Q

Covered bond

A

Debt obligation secured by a segregated pool of assets called the cover pool. The issuer must maintain the value of the cover pool. In the event of default, bondholders have recourse against both the issuer and the cover pool.

58
Q

Credit analysis

A

The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.

59
Q

Credit default swap (CDS)

A

A type of credit derivative in which one party, the credit protection buyer who is seeking credit protection against a third party, makes a series of regularly scheduled payments to the other party, the credit protection seller. The seller makes no payments until a credit event occurs.

60
Q

Credit derivatives

A

A contract in which one party has the right to claim a payment from another party in the event that a specific credit event occurs over the life of the contract.

61
Q

Credit enhancements

A

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

62
Q

Credit-linked coupon bond

A

Bond for which the coupon changes when the bond’s credit rating changes.

63
Q

Credit-linked note (CLN)

A

Fixed-income security in which the holder of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.

64
Q

Credit migration risk

A

The risk that a bond issuer’s creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher. Also calleddowngrade risk.

65
Q

Credit risk

A

The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment. Also calleddefault risk.

66
Q

Credit spread option

A

An option on the yield spread on a bond.

67
Q

Credit tranching

A

A structure used to redistribute the credit risk associated with the collateral; a set of bond classes created to allow investors a choice in the amount of credit risk that they prefer to bear.

68
Q

Creditworthiness

A

The perceived ability of the borrower to pay its debt obligations in a timely manner; it represents the ability of a company to withstand adverse impacts on its cash flows.

69
Q

Cross-default

A

Covenant or contract clause that specifies a borrower is considered in default if they default on another debt obligation.

70
Q

Cross-default provisions

A

Provisions whereby events of default, such as non-payment of interest on one bond, trigger default on all outstanding debt; implies the same default probability for all issues.

71
Q

Currency option bonds

A

Bonds that give bondholders the right to choose the currency in which they want to receive interest payments and principal repayments.

72
Q

Currency swap

A

A swap in which each party makes interest payments to the other in different currencies.

73
Q

Current yield

A

The sum of the coupon payments received over the year divided by the flat price; also called theincomeorinterest yieldorrunning yield.

74
Q

Curve duration

A

The sensitivity of the bond price (or the market value of a financial asset or liability) with respect to a benchmark yield curve.

75
Q

Daily settlement

A

Mark to market : The revaluation of a financial asset or liability to its current market value or fair value. Marking to market

Fixed Income Securities (1 decks)

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