Features Flashcards
What is a loan?
Debt instrument formed and governed by a private agreement usually between an individual or company and a financial intermediary, such as a bank.
What are bonds or fixed-income securities?
More standardized contractual agreements between larger issuers and investors. A bond issuer borrows money often to fund operations or capital expenditures. Bond investors are lenders who provide funds to the issuer in exchange for interest payments and future repayment of principal.
What is the principal / par value / face value?
The amount the issuer repays to bondholders at maturity.
What is a coupon payment?
On each interest payment date, the bond issuer commits to pay bond holders an interest or coupon payment equal to the coupon rate times the par value of the bond.
What is a prospectus?
Summarizes the key features of each bond issue
Who can issue bonds?
Any legal entity that wants to be liable for all interest and principal payments.
Government sector issuers include national/sovereign or local governments, supranational organizations, and quasi-government entities.
Why are sovereign bonds the lowest-credit-risk bond in each region?
Because those bonds are backed by the taxation and fiscal power of the issuing government.
What is the maturity of a bond?
The date of the final payment the issuer makes to investors.
What is the tenor of a bond?
The remaining time to maturity.
What are money-market securities?
Fixed-income securities with a tenor of one year or less at issuance, such as treasury bills or commercial paper issued by corporations.
What are capital market securities?
Bonds with tenors longer than one year at issuance.
What are perpetual bonds?
Bonds with no stated maturity.
Corporate bonds tend to pay semiannually.
What are floating-rate notes (FRNs)?
Bonds with variable interest payments. The FRN coupon is determined as a combination of a market reference rate (MRR) and an issuer-specific spread referred to as the credit spread.
What is the market reference rate?
A standard borrowing or lending rate for issuers with the highest creditworthiness or lowest default risk for different currencies and maturities.
What is the credit spread?
An issuer-specific spread on coupon rates. The credit spread is set at the time of FRN issuance, is usually constant over the bond’s life, and is expressed in basis points. The higher an issuer’s credit quality, the lower the spread.
What are zero-coupon bonds or pure discount bonds?
Bonds that do not pay periodic interest and instead pay interest as part of a single payment with principal at maturity. They are typically issued at discount to par.
What is seniority in debt instruments?
Seniority or priority of repayment among all issuer obligation is an important determinant of risk. Senior debt has priority over other debt claims in the case of bankruptcy or liquidation. Junior debt / subordinated debt claims have a lower priority than senior debt and are paid only once senior claims are satisfied.
What is a contingency provision?
A clause in a legal agreement that allows for an action if an event or circumstance occurs. The most common contingency provision for bonds involves embedded options - specifically, call, put, and conversion to equity options. These resemble option contracts but cannot be traded separately from the bond itself.
What is the current yield (CY)?
Bond’s annual coupon divided by the bond’s price
What is the Yield-to-maturity (YTM)?
Internal rate of return is calculated using the bond’s price and its expected cash flows to maturity.
What is a yield curve?
Graph of all an issuer’s debt instruments with identical features by their YTM and times to maturity.
Why do bonds with longer maturities have higher YTMs?
Investors are demanding higher expected returns to compensate for higher risk associated with longer-maturity bonds of the same issuer. A way to measure the credit risk for a bond is to compare an issuer’s yield curve to that of comparable sovereign bonds, which have little or no credit risk.
What is a bond indenture?
A legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders.
In addition to specifying a bond’s features, an indenture identifies the issuer’s sources of repayment, any commitments made by the issuer to bondholders, as well as any provisions that support or enhance the issuer’s ability to repay its debt in full.
What is an unsecured bond?
An unsecured bond (or debenture) has no collateral and is backed only by the issuer’s creditworthiness, making it riskier but often offering higher interest rates.
What is a secured bond?
A secured bond is backed by specific assets as collateral, meaning if the issuer defaults, bondholders can claim those assets.
Corporate bond issuers with less stable operating cash flows usually face more credit provisions and restrictions and may offer investors a legal claim or lien or pledge on specific assets as a secondary source of debt repayment in what are referred to as secured bonds.
What are asset-backed securities (ABS)?
Secured bonds with collateral
What are bond covenants?
Bondholders have limited influence over an issuer as compared to equity investors, who have voting rights. One exception to this is legally enforceable rules or bond covenants that borrowers and lenders agree on at the time a bond is issued or a loan is made.
What are affirmative and negative covenants?
Affirmative covenants specify what issuers are required to do, whereas negative covenants specify what issuers are prohibited from doing.
What is a pari passu clause / equal footing clause?
Ensures that a debt obligation is treated the same as the borrower’s other debt obligations with similar seniority.
What is a cross-default clause?
It specifies that borrowers are considered in default if they default on another debt obligation.
What is an incurrence test?
A set of covenants, to protect bondholders, which closely monitor certain financial ratios and restrict its ability to pay dividends to shareholders, repurchase shares, and/or take on additional debt unless tighter financial restrictions are met under what is referred to as an incurrence test.
What is a negative pledge clause?
