Fixed Income Flashcards
Payment-in-kind toggle note
allows the issuer to pay interest each period in either cash, in-kind, or a combination of the two
A split coupon bond
no coupon payments initially, and then pays a high coupon rate in cash until maturity, this is also known as a deferred coupon bond.
put and convertible bonds benefit the bond holder
allowing them to redeem the bond if the price falls
and
convert to equity shares if they are worth more than the maturity value
When the bank’s core Tier 1 capital ratios fall below a minimum level
bond will automatically convert into a share, boosting the bank’s equity capital
Callable bonds offer less capital appreciation potential because they’re more likely to be called when rates fall. Moreover they should offer higher income in the first place to compensate for the option
pays more tax on capital gains
Callable bonds can be called
in part or in whole (entire issue)
The source of capital to repay supranational bondholders
the repayment of previous loans made by the entity or from paid in capital from its members
An asset-backed security generally requires:
A special purpose vehicle to hold the collateral remotely from the issuer
> get a higher credit rating by ring-fencing the collateral from other obligations an issuer may have
assets are usually receivables: credit cards, student loans or mortgages
Credit cards and student loans are unsecured loans that rely on the borrower’s future income for repayment
monoline insurers
Insurance companies that specialize in providing financial guarantees
e.g. surety bonds
bond issuance process
The legal issuer may be different
By setting up a separate legal entity with its own balance sheet (SPV) an issuer can receive a higher credit rating which would typically reduce (not increase) the required yield.
Assuming the bond has an original issue tax provision, what Is the tax liability for the investor
A prorated portion of the original issue discount is included in taxable income every year until maturity
Primary market activities include
underwritten offering, private placements and best-effort public offerings
A step-up note
is a structured note with a coupon rate that rises over time
An inverse floater
is a structured note with a coupon rate that is inversely related to a reference rate
commercial paper
is typically a short-term unsecured debt instrument issued by corporate issuers
sovereign bonds
are usually unsecured,
the issuer does have the ability to use excess tax revenue (budget surplus) to fund interest payments.
Treasury bills (T-bills) are typically
> pure discount debt instruments with a maturity of 12 months at issue.
do not make explicit interest payments (zero-coupon bonds).
usually bought at a discount to par value and the investor receives the par (face) value at maturity.
Fannie Mae and Freddie Mac are best described as
Government Sponsored Enterprise (GSE) issuers
Ginnie Mae is a
federally related institution
non-sovereign bond can
> bond issuer can use the cash flows of a project (e.g. bridges and airports) that the bond was used to finance.
non-sovereign bond issuer can introduce special taxes on residents to fund bond payments.
A non-sovereign bond or non-sovereign government bond is a bond
issued by levels of government below the national level such as provinces, regions, states and cities.
Examples include municipal bonds issued in the US.
An agency bond or quasi-government bond are organizations
established by national governments to perform various functions for them.
Examples include Fannie Mae, Freddie Mac and Sallie Mae
The z-spread is used to compare
> represents compensation for credit risk, liquidity risk and option risk
measures the equal amount that must be added to each of the spot rates in a given benchmark term structure
Key rate duration helps us understand how a bond’s price will change given a
non-parallel shift in the yield curve