Fin.3 Flashcards
Accrual Bond
a fixed-interest bond that is issued at its face value and repaid at the end of the maturity period together with the accrued interest. In contrast to zero-coupon bonds, accrual bonds have a clearly stated coupon rate.
callable bond
It allows the issuer to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. On the call date(s), the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price.
Commercial Paper
a money-market security issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation’s promise to pay the face amount on the maturity date specified on the note.
Convertible Bond
Bond that the holder can convert into common stock in the issuing company or cash of equal value. Hybrid security with debt- and equity-like features.
Floating rate notes (FRNs)
Bonds that have a variable coupon, plus a quoted spread (quoted margin). At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD LIBOR +0.20%.
Inflation-indexed bonds
The principal is indexed to inflation. It pays a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.
Perpetual bond
Bond with no maturity date. Issuers pay coupons on Perpetual bonds forever, and they do not have to redeem the principal.
Clean Price
The price of a bond excluding any interest that has accrued since issue or the most recent coupon payment.
credit default swap (CDS)
A financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS ““fee”” or ““spread””) to the seller and, in exchange, receives a payoff if the loan defaults.
3 Examples of Credit Events
Bankruptcy, Failure to Pay, Restructuring
credit default swap index
A credit derivative used to hedge credit risk or to take a position on a basket of credit entities. A completely standardised credit security and more liquid and trade at a smaller bid-offer spread.
2 main families of CDS indices
(a) CDX indices contain North American and Emerging Market companies - administered by CDS Index Company (CDSIndexCo) and marketed by Markit Group Limited
(b) iTraxx contain companies from the rest of the world managed by the International Index Company (IIC)and owned by Markit
iTraxx Europe HiVol
Highest spread (riskiest) non-financial names from iTraxx Europe index (30 entities)
iTraxx Europe Crossover
Sub-investment grade names (40 entities)
iTraxx Asia
Asia ex-Japan Investment Grade (50 entities)
iTraxx Asia HY
Asia ex-Japan High Yield (20 entities)
iTraxx SOVX IG
Sovereign Global Liquid Investment Grade
CDX.NA.IG.HVOL
High Volatility investment grade CDSs
CDX.NA.HY
High Yield CDSs
Arbitrage
the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.
Swaption
an option granting its owner the right but not the obligation to enter into an underlying swap. Eg, interest rate swaps
payer swaption
It gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg.
receiver swaption
It gives the owner of the swaption the right to enter into a swap in which they will receive the fixed leg, and pay the floating leg.
Bermudian swaption
the owner is allowed to enter the swap on multiple specified dates.
European swaption
the owner is allowed to enter the swap only on the expiration date. These are the standard in the marketplace
American swaption
the owner is allowed to enter the swap on any day that falls within a range of two dates.
barrier option
an exotic derivative typically an option on the underlying asset whose price breaching the pre-set barrier level either springs the option into existence or extinguishes an already existing option.
