FI: Debt Securities Flashcards
Bond Indenture =
contract of rights and obligations of issuer and owner
Covenants (negative and affirmative) =
contract provisions
Negative: company can’t: back several debt issues with the same collateral, sell assets pledged as collateral, borrow additional money unless restrictions are met.
Affirmative: include maintenance of certain financial ratios, possibly leading to ‘technical default’ if breached.
Straight bond =
regular, non callable, typically semi annual coupon.
ie US tsy, many corporates
Zero- coupon =
do not pay periodic interest.
pay par at maturity
initially sold at a discount to par
aka PURE DISCOUNT SECURITIES
Step-up notes =
coupon rates that increase over time at a specified rate - increase may take place one or more times
Deferred coupon bonds =
initial coupon payments are deferred for some period.
coupon payments accure at a compound rate over the deferral period and are paid as a lump sum
after the initial deferment period these bonds pay coupon interest like a regular bond.
Floaters =
coupon interest is based on a specific interest rate or index.
In essence, the coupon rate resets every period (3, 6, 12 months) based on prevailing market interest rates.
normally REFERENCE RATE +/- STATED MARGIN
the stated margin may vary according to the ‘coupon formula’
CAN ALSO HAVE CAPS AND FLOORS ON THE COUPON - BOTH A CAP AND A FLOOR IS CALLED A COLLAR
Inverse floater =
coupon rate increases as the reference rate decreases
ie coupon formula, coupon = 12% - ref rate
inflation-linked bonds (infl indexed) =
floater based on inflation ie 3% + annual change in CPI
Accrued interes, dirty/clean price =
FULL (DIRTY) PRICE = CLEAN PRICE + ACCRUED INTEREST
a bond trading with the right to the next coupon is termed ‘cum coupon’ (this is the case in the US)
if an issuer is in default (and will not pay coupon) the bond is said to trade ‘flat’, without accrued interest.
Non amortizing/bullet =
interest paid until maturity and face value paid at maturity
ie coupon tsy, most corps
Amortizing security =
makes periodic interest and principal payments over the bond’s life - ie a conventional mortgage
a fully amortizing loan retires the last remaining principal on the final maturity date/payment
Prepayment options =
gives the issuer/borrower the right to accelerate the principal repayment on the loan
for mortgages and other amortizing loans
(when a borrower sells the underlying asset they are required to pay the loan off in full)
SIGNIFICANCE: increased uncertainty in the cash flows for the lender of funds.
Call provision =
bond holders have no choice but to surrender bonds at the call price - and the bondholder will no longer have to pay interest
allow issuers to replace HIGHER THAN MARKET coupon bonds with LOWER COUPON BONDS.
may have multiple call dates, typically with declining call prices
bondholder may have a period of ‘call protection’ before bonds become callable.
‘Non refundable’ vs callable =
a bond may be NON REFUNDABLE but CALLABLE - this means the issuer cannot issue a lower coupon bond in order to pay for the call on the bond (termed a REFUND, as opposed to when a bond is REDEEMED (called without a refund))
