Fixed Income Flashcards
Define fixed income
any borrowing of money is debt (fixed income security)
- promised payments are contractual obligations
- payment of interest and principal are a prior claim on
the company’s earnings and assets versus equity
Basic features of a bond: Issuer
Features of a bond: maturity and par value
Features of a bond: Coupon rate and frequency
Features of a bond: Denomination
What are the bond yield measures and relationship between YTM and price
What is Bond indenture and what does the trust deed include 1?
What does the trust deed contain: sources of payment proceeds and asset backing
Trust deed : credit enhancements
Trust deed: covenants and types of negtaive covenants
Covenants - legally enforceable rules
Affirmative - typically administrative in nature
- what issuers are required to do
Describe domestic, foreign and Euro bonds
Describe global bonds and the bond tax considerations
Describe Bullet, fully and partially amortising bonds
Bullet: Bonds pays interest payment with large balloon payment at the end. Most common and all govt bonds are like this.
Amortising: Payments of interest and principal periodically. Partially amortising means there is still a larger balloon payment at the end.
Describe a sinking fund arrangement
Describe the payment structures of floating rate note, Step-up coupon, credit-linked coupon , Payment-in-kind
Describe deferred coupon bonds (split coupons) and Index-linked bonds
Describe the types of index linked bonds
What is a callable bond and what are the different types
calls can be: American - continuously callable
European - only on call date (1 date)
Bermuda - only on call dates after the lockout period
- usually on coupon dates
Describe a putable bond
Describe a convertible bond
First four methods of fixed income market classification
What are the steps in a public debt offering
Describe underwritten offerings, best-efforts offering, and auction
Describe a private placement and secondary bond markets
What are sovereign bonds and their different types
Describe non-soverign, quasi-govt and supranational bonds
Types of corporate debt
Difference betweens us and euro commercial paper
Public debt coupon and principal payment structures
Types of structured financial instruments: Capital protected and Yield enhancement
Participation instruments and leveraged insrtuments
Short term funding alternatives: Retail deposits and reserve funds?
Short term funding alternatives: Interbank funds and large denomination negotiable CDs
What is a repurchase and reverse agreement (repo)?
Repo from the lenders perspective
What is the YTM of a bond and what does it assume?
Yield-to-Maturity - if PV is known ( i.e. bond’s market price), YTM can be calculated
- YTM is the IRR of the bond’s cash flows
How are bond prices affected by changes in market interest rate, convexity effect and the coupon effect and the maturity effect?
4/ for the same coupon rate: longer-term bond is more price sensitive than a shorter term bond
What are the two price components of bonds that are between coupon dates?
What is matrix pricing and the steps?
How do periodicity conversions to find bond equivalent yields for different coupon frequency bonds and what is difference between bond equivalent yield and effective annual yield?
bond equivalent yield is annualised while effective annual yield is compounded
YTM conversion calculation example
Yield measures for government bonds
Describe how flat price, full price and accrued interest relate?
Full price = normal bond price *(1+ytm)^(AI period)
Flat price = full - accrued interest
Accrued interest = AI period *coupon payment
Conventions of floating rate bonds
Pricing of money market instruments
Pricing a floating rate bond example
Formula for add on rates for money market instruments
Converting from discount rate to add on rate
Yield curve for bonds that are the same
Forward curve and calculating implied forward rate
What is the par curve?
What is the I, G and Z spread?
Which factors affect the spread and reference components?
What are the benefits of securitisation
What is the process of securitisation and who is involved?
Explain time tranching
Explain the balance sheet implications of the SPV vs the originator
Explain combined credit and time tranching
What is a residential MBS?
What are mortgage pass through securities?
What is the single monthly mortality rate? and what is the conditional prepayment rate
CPR = 1 – (1 - SMM)^12 (annualised)
What does 100 PSA mean and how is CPR calculated?
Weighted average life of MBS? And what happens when mortgage rate drops
How does pre-payment risk manifest itself through extension and contraction risk?
How are collateralised mortage obligation (CMO) constructed?
Planned Amortization Class (PAC) & Support Tranches
What is a floating rate tranche?
Which tranche structure is most suitable for, investor concerned about contraction risk, investor looking for stable average life, Investor expecting rates to fall, investor ok with prepayment risk for high expected
return?
Difference between agency and non-agency residential MBS?
What are internal and external credit enhancements?
What are commercial MBS?
Call protection for a CMBS?
What are Auto-loan backed securities?
What are credit-card backed securities?
What is the payment structure for CCBS?
What is a CDO?
What are Covered bonds and the three major redemption regimes?
What are three sources of risk for a fixed rate bond and what does the YTM assume?
YTM assumes
1) held to maturity
2) No default
3) Coupons re-invested at same rate of interest
What is bond duration?
What are the types of bond duration?
What is modified duration?
Approx Modified duration formula?
What is effective duration and why does normal duration not work for bonds with embedded options?
Explain the difference between effective duration and modified, and does a change in the price yield curve equal a change in yield?
Modified duration measures the change in bond price from changes in the bonds own yield while effective duration measures it with respect to changes in the benchmark yield curve
What is key rate duration and when is it used?
Effective duration is the sum of all key rate durations for each maturity and thus %change in portfolio value
What are the properties of bond duration, with changes in coupon and YTM, and compare the properties of a discount, zero-coupon and perpetual bond?
Duration of bond portfolio calculation
What is money duration?
What are the primary and secondary effects of changes in value from changes in YTM and the formula for convexity?
Interpret the duration gap
Summary of the components of risk in a corporate bond?
Difference between Analytical and empirical duration?
Empirical duration Is based on historic price movements. It is more likelv to be lower than analvtical duration for bonds that have credit risk. as credit spreads tend to change when benchmark interest rates change. For example, when interest rates decrease in times of market stress, credit spreads often rise, offsetting some of the decrease in benchmark rates. For bonds with high credit risk, the widening of the spread may more than offset the decrease
leading to negative duration.
The greater the difference between the analytical and emperical then the greater the credit risk.
What are the two components of credit risk?
What are the three credit related risks?
What are the ranks of debt classes?
What is the difference between issue vs issuer ratings
Four properties of credit ratings?
Four c’s of credit analysis: capacity
Four c’s of credit analysis: collateral
/ Collateral - refers to the quality and value of the assets
- typically emphasized more with lower credit quality issuers
Four c’s of credit analysis: covenants
Four c’s of credit analysis: characther
What five things affect credit spreads
High yield bonds are usually due to ?
What are the first two special considerations for HY debt?
HY special considerations 3 and 4
HY special considerations 5 and 6
How to assess sovereign and on-sovereign debt
Ratings agencies limit for non-investment grade debt
