Exam Flashcards
A cross currency basis swap enables….
a counterparty to exchange principal and interest flows in a pair of currencies
The Bills of Exchange Act governs:
a) bank loans
b) bank accepted bills
c) commercial paper
d) promissory notes
Bills of Exchange Act governs:
b) Bank bills
Note: Commercial paper is covered by Contract Law;
In a coupon matched cross currency interest rate swap the conversion factor is
…the conversion factor is an adjustment made to a credit spread due to different basis point values
An indexed annuity bond pays
a) a fixed return in all circumstances
b) a variable return in all circumstances
c) a CPI linked return at the maturity of the bond
d) a CPI linked return over the life of the bond akin to a pension
d) a CPI linked return over the life of the bond akin to a pension
A Dutch Auction is a technique used following a bookbuild to:
minimise the spread of a bond
starts from the highest price and descends until someone accepts
Mortgage Insurance:
a) protects the home owner from default
b) ensures the insurer will be sued
c) protects the lender from default by the insurer
d) enables novation of a loan from the lender to the insurer
d) enables novation of a loan from the lender to the insurer
An IAB pays an investor
a) an annuity indexed to inflation
b) a fixed rate annuity
c) an annuity stream with nominal principal paid at maturity
d) an annuity stream with indexed principal paid at maturity
a) an annuity indexed to inflation
The term “attachment point” refers to
a) the time to maturity of a CDO
b) the point at which losses begin to impact a CDO tranche
c) the rating of a CDO tranche
d) a bond managers unwillingness to dispose of a CDO
Attachment point determines how much subordination the tranche enjoys.
b) the point at which losses begin to impact a CDO tranche
A synthetic CDO is
a) a list of reference entities
b) refers to the collateral of a repo agreement
c) an asset portfolio comprised of CDS
d) a AAA rated security sold to investors
c) an asset portfolio comprised of CDS
List the key features of the CP market
- short term, <36 days
- discount security
- governed by contract law
- generally unsecured
- issued by companies to fund short term working capital needs
- typically 30, 90, 180 days
- priced with reference to BBSW
Identify the types of debt subordination and briefly describe how they arise
- deed of subordination (governs relationship between investors)
- security (unsecured creditors are subordinate to secured creditors)
- structural subordination (different levels to the company - eg holding company vs operating cmpany if op co has all the assets & cashflows. Will require guarantee from parent. Interlocking guarantees.
- Documentation - covenants difference between lenders - definition of EBITDA etc
- Tenor - longer term lenders must protect themselves from subordination
Negative pledge
will not offer securities without offering them to you (or amount could be capped)
Briefly outline the steps involved in bringing a bond to market
- Origination
- Marketing, beauty parade, board process
a) Preparation, incl IM, Dealer, Deed Poll, P& I policy, Reg S. Time frame 6 weeks
b) marketing, incl roadshow (1 week), information / credit assessments done by investors, price transaction. Book build - normally 24 hours for corps. Consider 128f income withholding tax
c) closing: Launch - books close. Consider sensitivity of investors at clearing, at the range, specific level.. Scaling, allocations given to investors. At the pricing call: everything is priced in s/q coupon asset swap.
Pricing is in semi quarterly - why
- Cash & carry
- more profitable to buy transaction and do 3/6 FRA in the case of semi annual
Australian Information Memorandum
- light
- several docs included by reference
- in other jurisdiction all docs are incorporated
Name 3 credit risks
- liquidity
- credit
- interest rate
Name 4 ways of raising money
- single name
- securitisation
- bilateral
- syndicate
Debt maturity profile
Diversification
Debt maturity profile should be flat and spaced across the tenors
Diversify the deal across investor type, geographic diversity
FInancial Covenants
- tests
- Balance Sheet Test - minimum net worth
- “I promise to maintain my interest cover at x” - Cashflow Test - interest cover test
- leverage ratios (eg debt:EBITDA, Debt: total equity
- debt service ratios
Covenant Types
- incurrent covenant
- maintenance covenant
- change of control
Incurrent covenant
- If my debt interest is x, I will not incur any further debt (ie could get a waiver from investors)
- not a default unless you incur further debt
Maintenance covenant
- breach of maintenance is default
Describe 4 uses of a conduit
- credit arbitrage (use SPV to lend long, borrow short)
- repackaging vehicle (ie packaged bond that includes the SPV and a currency swap as part of the package)
- Short term funding vehicle (SPV is not on balance sheet. Warehouse mortgages as they are written, place into SPV standby facility (owned by charitable trust), then issue commercial papaer
- Securitisation (eg packaging of mortgages RMBS)
HOw do you increase a pool to AAA?
- overcollateralisation (not so much on RMBS. Have P&I, amortisation is faster)
- subordination (tranching)
- lenders mortgage insurance (LMI)
- cash excess interest (excess spread) buffer goes to cash against losses.
List subordination types
- structure
- deed
- tenor
- security
- documentation / covenant (eg interest cover covenant, gearing covenant)
Briefly describe the methods used to credit enhance an RMBS transaction
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Use a diagram to describe the process of intermediation
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Covered Interest Arbitrage
- Investor capitalises on the interest rate differential between 2 countries by using a forward contract to cover exchange risk.
- Trade in a foreign currency fixed interest security; together with a matching forward agreement to hedge currency risk
