Fin.3

Question 1

Accrual Bond

Answer 1

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.

Question 2

callable bond

Answer 2

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.

Question 3

Commercial Paper

Answer 3

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.

Question 4

Convertible Bond

Answer 4

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.

Question 5

Floating rate notes (FRNs)

Answer 5

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%.

Question 6

Inflation-indexed bonds

Answer 6

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.

Question 7

Perpetual bond

Answer 7

Bond with no maturity date. Issuers pay coupons on Perpetual bonds forever, and they do not have to redeem the principal.

Question 8

Clean Price

Answer 8

The price of a bond excluding any interest that has accrued since issue or the most recent coupon payment.

Question 9

credit default swap (CDS)

Answer 9

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.

Question 10

3 Examples of Credit Events

Answer 10

Bankruptcy, Failure to Pay, Restructuring

Question 11

credit default swap index

Answer 11

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.

Question 12

2 main families of CDS indices

Answer 12

(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

Question 13

iTraxx Europe HiVol

Answer 13

Highest spread (riskiest) non-financial names from iTraxx Europe index (30 entities)

Question 14

iTraxx Europe Crossover

Answer 14

Sub-investment grade names (40 entities)

Question 15

iTraxx Asia

Answer 15

Asia ex-Japan Investment Grade (50 entities)

Question 16

iTraxx Asia HY

Answer 16

Asia ex-Japan High Yield (20 entities)

Question 17

iTraxx SOVX IG

Answer 17

Sovereign Global Liquid Investment Grade

Question 18

CDX.NA.IG.HVOL

Answer 18

High Volatility investment grade CDSs

Question 19

CDX.NA.HY

Answer 19

High Yield CDSs

Question 20

Arbitrage

Answer 20

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.

Question 21

Swaption

Answer 21

an option granting its owner the right but not the obligation to enter into an underlying swap. Eg, interest rate swaps

Question 22

payer swaption

Answer 22

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.

Question 23

receiver swaption

Answer 23

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.

Question 24

Bermudian swaption

Answer 24

the owner is allowed to enter the swap on multiple specified dates.

Question 25

European swaption

Answer 25

the owner is allowed to enter the swap only on the expiration date. These are the standard in the marketplace

Question 26

American swaption

Answer 26

the owner is allowed to enter the swap on any day that falls within a range of two dates.

Question 27

barrier option

Answer 27

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.