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Fixed Income > Fabozzi - 1 > Flashcards

Fabozzi - 1 Flashcards

1
Q

What is the par value of a bond?

A

The amount the issuer agrees to repay the bondholder at maturity.

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2
Q

How are bond prices quoted?

A

As a percentage of par value, with par value equal to 100.

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3
Q

What is a coupon rate?

A

The interest rate the issuer agrees to pay each year.

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4
Q

How is the coupon amount calculated?

A

By multiplying the par value by the coupon rate.

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5
Q

What is a zero-coupon bond?

A

A bond that does not make periodic coupon payments; the bondholder realizes interest at maturity.

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6
Q

What is a floating-rate security?

A

A bond whose coupon rate resets periodically based on a formula, usually a reference rate plus a quoted margin.

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7
Q

What is a cap in a floating-rate security?

A

A maximum coupon rate that can be paid, which is a disadvantage to the bondholder.

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8
Q

What is a floor in a floating-rate security?

A

A minimum coupon rate that can be paid, which is an advantage to the bondholder.

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9
Q

What is a step-up note?

A

A bond whose coupon rate increases over time.

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10
Q

What is accrued interest?

A

The interest that has accrued since the last coupon payment and is owed to the bond seller by the buyer.

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11
Q

What is the difference between full price and clean price?

A

Full price (dirty price) includes accrued interest, while clean price excludes accrued interest.

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12
Q

What is an amortizing security?

A

A bond for which there is a schedule for the repayment of principal.

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13
Q

What is a call provision?

A

An option for the issuer to retire all or part of the bond issue before the stated maturity date.

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14
Q

Who benefits from a call provision?

A

The issuer benefits, while it is a disadvantage to the bondholder.

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15
Q

What is a deferred call?

A

A callable bond that cannot be called for a number of years after issuance.

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16
Q

What is a call schedule?

A

A schedule where the call price depends on when the issuer calls the bond.

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17
Q

What is a make-whole premium provision?

A

A formula designed to protect the bondholder’s yield when an issuer calls a bond.

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18
Q

What is the difference between regular redemption price and special redemption price?

A

Regular redemption prices apply to normal calls, while special redemption prices apply to debt redeemed through a sinking fund or other provisions.

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19
Q

What is call protection?

A

Restrictions that prevent an issuer from calling a bond early.

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20
Q

What is a sinking fund provision?

A

A requirement for the issuer to retire a specified portion of the bond issue each year.

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21
Q

What is an accelerated sinking fund provision?

A

An option for the issuer to retire more than the required amount to satisfy the sinking fund requirement.

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22
Q

What is a putable bond?

A

A bond where the bondholder has the right to sell the bond back to the issuer at a specified price on designated dates.

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23
Q

What is a convertible bond?

A

A bond that gives the bondholder the right to exchange it for a specified number of shares of common stock.

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24
Q

How do embedded options affect bond valuation?

A

They make valuation complex by requiring modeling of interest rates and issuer/borrower behavior to project cash flows.

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25
Q

How do institutional investors finance bond purchases?

A

Typically through repurchase agreements rather than margin buying.

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26
Q

What is a repurchase agreement (repo)?

A

The sale of a security with a commitment to repurchase it at a specific price on a specific date.

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27
Q

What is the repo rate?

A

The borrowing rate for a repurchase agreement, generally lower than bank borrowing rates.

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28
Q

What is the difference between a nonamortizing bond and an amortizing bond?

A

A nonamortizing bond repays principal only at maturity, while an amortizing bond repays principal periodically.

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29
Q

What is the distinction between a noncallable and a nonrefundable bond?

A

A noncallable bond cannot be called early, while a nonrefundable bond cannot be refunded with lower-cost debt.

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30
Q

What is the difference between call and refunding provisions?

A

A call provision allows early redemption, while refunding provisions restrict using cheaper debt to replace existing debt.

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31
Q

What is prepayment option?

A

The right of the borrower to repay principal before the scheduled due dates.

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32
Q

What is margin buying?

A

Borrowing funds to purchase a security by using the security itself as collateral.

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33
Q

What are affirmative covenants?

A

Positive obligations that the issuer must adhere to, such as maintaining certain financial ratios.

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34
Q

What are negative covenants?

A

Restrictions placed on the issuer, such as limitations on additional debt issuance.

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35
Q

What is a currently callable bond?

A

A bond that has no protection against early call by the issuer.

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36
Q

What are floating-rate securities structured with?

A

A coupon formula based on a reference rate plus a margin, and may have interest rate caps or floors.

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37
Q

What is the importance of options embedded in a bond issue?

A

They affect bond pricing, yield, and risk, impacting both issuers and bondholders.

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38
Q

What is a refunding protection?

A

A restriction on the issuer’s ability to redeem bonds using the proceeds of a lower-cost debt issue.

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39
Q

How does a call provision differ from a sinking fund provision?

A

A call provision allows for early redemption of the entire issue, while a sinking fund retires a portion of the issue each year.

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40
Q

What is the benefit of a put option to bondholders?

A

It allows bondholders to sell the bond back to the issuer if interest rates rise or the issuer’s credit deteriorates.

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41
Q

What is a fixed-rate coupon bond?

A

A bond that pays a fixed interest rate over its entire life.

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42
Q

What is a zero-coupon bond?

A

A bond that does not make periodic interest payments but is issued at a discount and repaid at face value at maturity.

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43
Q

What is a deferred coupon bond?

A

A bond that postpones the interest payments until a later date, usually paying higher interest after the deferral period.

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44
Q

What is a floating-rate bond?

A

A bond with an interest rate that fluctuates based on a reference rate plus a fixed spread.

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45
Q

What are interest rate caps in floating-rate bonds?

A

A limit on how high the coupon rate can go, which is a disadvantage to the bondholder.

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46
Q

What are interest rate floors in floating-rate bonds?

A

A limit on how low the coupon rate can go, which is an advantage to the bondholder.

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47
Q

What is accrued interest?

A

Interest that has been earned but not yet paid since the last coupon payment.

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48
Q

What is the full price (dirty price) of a bond?

A

The bond price including accrued interest.

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49
Q

What is the clean price of a bond?

A

The bond price excluding accrued interest.

50
Q

What is a nonamortizing bond?

A

A bond that repays the principal in full at maturity without any periodic principal payments.

51
Q

What is an amortizing bond?

A

A bond that repays principal periodically over the life of the bond.

52
Q

What is a call provision?

A

An option for the issuer to redeem the bond before maturity at a specified price.

53
Q

What is the difference between call and put options in bonds?

A

A call option allows the issuer to redeem early, while a put option allows the bondholder to sell the bond back to the issuer.

54
Q

What is the purpose of a make-whole provision in callable bonds?

A

It compensates bondholders by ensuring they receive a specified yield if the bond is called early.

55
Q

What is call protection?

A

A period during which a callable bond cannot be called by the issuer.

56
Q

What is a sinking fund provision?

A

A requirement for the issuer to periodically retire a portion of the bond issue before maturity.

57
Q

What is a special redemption price?

A

A price applied when bonds are redeemed through provisions like the sinking fund, which may differ from the regular call price.

58
Q

What is a nonrefundable bond?

A

A bond that cannot be redeemed using proceeds from issuing lower-cost debt.

59
Q

What is a noncallable bond?

A

A bond that cannot be redeemed early by the issuer under any circumstances.

60
Q

What is a conversion option in a bond?

A

A right given to bondholders to convert the bond into a specified number of shares of the issuer’s common stock.

61
Q

Who benefits from a call option in a bond?

A

The issuer benefits by redeeming the bond early, typically when interest rates fall.

62
Q

Who benefits from a put option in a bond?

A

The bondholder benefits by selling the bond back to the issuer, typically when interest rates rise or the issuer’s credit deteriorates.

63
Q

What is a sinking fund provision’s advantage for bondholders?

A

It reduces credit risk by ensuring that part of the bond is repaid periodically.

64
Q

What is an accelerated sinking fund provision?

A

It allows the issuer to retire more bonds than required under the sinking fund, often when financially favorable.

65
Q

What is a margin agreement?

A

A borrowing arrangement where an investor purchases a security by borrowing money, using the security itself as collateral.

66
Q

What is a repurchase agreement (repo)?

A

A short-term borrowing arrangement where a bond is sold with an agreement to buy it back at a future date, typically at a higher price.

67
Q

What is the repo rate?

A

The interest rate charged in a repurchase agreement, typically lower than bank borrowing rates.

68
Q

How is a bond’s coupon formula structured in floating-rate securities?

A

It is typically based on a reference rate (e.g., LIBOR) plus a fixed margin or spread.

69
Q

What are the advantages of embedded options for issuers?

A

They allow flexibility in managing interest rate risks and financing costs, such as calling bonds when rates fall.

70
Q

What are the advantages of embedded options for bondholders?

A

They provide the bondholder with options like converting to stock or selling back the bond, offering protection against interest rate or credit risk changes.

71
Q

What is a make-whole call provision?

A

A clause that requires the issuer to compensate bondholders for lost interest if a bond is called early, protecting the bondholder’s yield.

72
Q

What is a deferred coupon bond?

A

A bond where interest payments are delayed until a specified date, after which they may increase or become regular.

73
Q

What is a step-up bond?

A

A bond whose coupon rate increases at specified intervals over time.

74
Q

What is refunding protection?

A

A restriction that prevents the issuer from replacing the bond with lower-cost debt until a certain period has passed.

75
Q

What is the difference between a margin purchase and a repurchase agreement?

A

A margin purchase uses borrowed funds to buy securities, while a repurchase agreement involves selling a security with a commitment to repurchase it later.

76
Q

What is the regular redemption price of a bond?

A

The price at which a bond can be called under normal circumstances, often set above par.

77
Q

What is a special redemption price of a bond?

A

A price for redeeming bonds early due to specific provisions, such as a sinking fund, which may be lower than the regular call price.

78
Q

What is the purpose of call protection in a bond?

A

To safeguard bondholders from early redemption, ensuring a stable income stream for a defined period.

79
Q

What is the typical formula for determining the coupon rate in a floating-rate bond?

A

It is typically the sum of a reference rate (e.g., LIBOR) plus a fixed margin determined at issuance.

80
Q

What is an affirmative covenant in bond indentures?

A

A legal obligation requiring the issuer to take specific actions, such as maintaining insurance or specific financial ratios.

81
Q

What is a negative covenant in bond indentures?

A

A clause that restricts certain activities of the issuer, such as limiting the amount of additional debt they can incur.

82
Q

How does an amortizing bond reduce credit risk?

A

By repaying portions of the principal periodically, reducing the amount owed at maturity.

83
Q

What is a bond indenture?

A

A legal contract that outlines the terms and conditions between the bond issuer and bondholders.

84
Q

What is a fixed-rate coupon bond?

A

A bond with a constant interest rate paid to bondholders throughout its life.

85
Q

What is the benefit of a floor in a floating-rate bond?

A

It ensures that the bondholder receives a minimum interest payment, regardless of how low the reference rate drops.

86
Q

What is a cap in a floating-rate bond?

A

A maximum limit on how high the interest rate can rise, protecting the issuer from rising interest costs.

87
Q

What is a callable bond?

A

A bond that gives the issuer the right to redeem it before maturity at a predetermined price.

88
Q

What is a deferred call provision?

A

A feature that prevents the issuer from calling a bond for a certain number of years after issuance.

89
Q

What is the call price?

A

The price at which a bond can be redeemed by the issuer before its maturity, typically higher than the bond’s par value.

90
Q

What is a put option in a bond?

A

A feature allowing bondholders to sell the bond back to the issuer at a specified price before maturity.

91
Q

How does a convertible bond work?

A

It gives the bondholder the right to convert the bond into a predetermined number of shares of the issuer’s stock.

92
Q

What is a make-whole premium?

A

A provision that compensates bondholders for lost interest if a bond is called early, calculated to maintain the bond’s expected yield.

93
Q

What is a sinking fund?

A

A fund established by the issuer to retire portions of a bond issue before maturity, reducing the overall debt.

94
Q

What is the difference between a regular and special redemption price?

A

The regular redemption price applies to a normal call, while the special redemption price is used for specific provisions like sinking fund redemptions.

95
Q

What is an amortizing bond?

A

A bond that repays principal in periodic installments over the life of the bond.

96
Q

What is the benefit of an amortizing bond for bondholders?

A

It reduces credit risk by returning part of the principal periodically, decreasing the amount still owed.

97
Q

What is a currently callable bond?

A

A bond that has no protection against early redemption and can be called at any time by the issuer.

98
Q

What is a sinking fund provision’s impact on bondholders?

A

It decreases default risk by ensuring that the issuer repays portions of the principal over time.

99
Q

What is a repo transaction?

A

A short-term agreement where a seller sells a security with the agreement to repurchase it later at a higher price.

100
Q

How do institutional investors typically finance bond purchases?

A

They use repurchase agreements (repos) rather than margin borrowing.

101
Q

What is a repo rate?

A

The interest rate applied in a repurchase agreement, generally lower than other forms of borrowing.

102
Q

What is a noncallable bond?

A

A bond that cannot be redeemed by the issuer before maturity.

103
Q

What is the advantage of a noncallable bond to bondholders?

A

It provides bondholders with certainty of interest payments and principal repayment until maturity.

104
Q

What is the purpose of a prepayment option in bonds?

A

It allows borrowers to repay part or all of the bond’s principal before the scheduled repayment dates.

105
Q

How does call protection benefit bondholders?

A

It ensures that the bond cannot be redeemed early, providing a stable income stream for the bondholder.

106
Q

What is a step-up coupon bond?

A

A bond where the coupon rate increases at specified intervals, benefiting investors as interest rates rise.

107
Q

What is refunding protection?

A

A feature that prevents the issuer from using cheaper debt to replace existing bonds until a certain period has passed.

108
Q

What is the clean price of a bond?

A

The price of a bond excluding any accrued interest.

109
Q

What is the dirty price of a bond?

A

The price of a bond including accrued interest, also known as the full price.

110
Q

What are affirmative covenants?

A

Legal commitments that require the issuer to meet certain conditions, such as maintaining insurance or financial ratios.

111
Q

What are negative covenants?

A

Restrictions in a bond indenture that prevent the issuer from taking certain actions, like issuing more debt or selling assets.

112
Q

How does an issuer benefit from a call provision?

A

It allows the issuer to redeem the bond early, often when interest rates have dropped, reducing their borrowing costs.

113
Q

How does a bondholder benefit from a put option?

A

It allows the bondholder to sell the bond back to the issuer, usually if interest rates rise or the issuer’s creditworthiness declines.

114
Q

What is margin buying?

A

A method where investors borrow money to buy securities, using the purchased security as collateral.

115
Q

What is the difference between a margin purchase and a repurchase agreement?

A

A margin purchase involves borrowing funds to buy a security, while a repurchase agreement is a sale of a security with a commitment to buy it back.

116
Q

What is an embedded option in a bond?

A

A feature such as a call, put, or conversion option, that gives either the issuer or bondholder additional rights.

117
Q

How does an accelerated sinking fund provision work?

A

It allows the issuer to retire more bonds than required under the sinking fund, often used when financially advantageous.

118
Q

What is the coupon formula in floating-rate securities?

A

The coupon rate is determined by adding a fixed margin to a reference rate like LIBOR.

119
Q

What is the difference between a nonrefundable bond and a noncallable bond?

A

A nonrefundable bond cannot be refinanced with cheaper debt, while a noncallable bond cannot be redeemed early.

120
Q

How does a make-whole premium protect bondholders?

A

It compensates bondholders for any lost interest if the issuer calls the bond early, preserving the bondholder’s expected yield.

Fixed Income (5 decks)

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