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CFA > Fixed income > Flashcards

Fixed income Flashcards

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1
Q

A pari passu is ? (/Equal footing )

A

Clause that ensures that a debt obligation is treated the same as a borrower’s senior debt instruments.

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1
Q

What is a FRN coupon rate ?

A

A floating rate note is used by low default risk issuers, comprises a MRR (market reference rate that RESETS PERIODICALLY) and a issuer specific spread that is constant and fixed at initiation.

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2
Q

What does the difference between the discounted price of a zero coupon bond and the par value represents ?

A

It represents cumulative interest payments at maturity.

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3
Q

What name securities with 1 year or more maturity have ?

A

Capital marke securities

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4
Q

What name securities with 1 year or less maturity have ?

A

Money market securities (like treasury bills or commercial paper)

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5
Q

What is the maturity of perpetual bonds ?

A

No maturity stated

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6
Q

What bonds are usually issued @ discount to par value ?

A

Zero-coupon bonds or pure discount bonds. The difference between the issuance price and par value is a cumulative interest payment.

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7
Q

What is a contengy provision ?

A

Bonds embedded with option that permits actions if an event occur. Include put, call or equity conversion. That option cannot be dissociated from the bond itself, so value it, compared with bond with no option included.

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8
Q

What is the current yield ?

A

Annual Dividend / Price of bond. Important of express annual div in % so that the current yield will be in %

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9
Q

What is the YTM in bonds ?

A

Its the IRR
As long as the investor
1. Receives all interest and principal payments.
2. Holds the bond until maturity
3. Reinvests all periodic cash flows at the YTM.

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10
Q

Unsecured debt vs secured debt is issued by with types of issuers ?

A

Low default risk issuers issue unsecured debt .

High probability of default issuers issue secured debt because less stable cash flows.

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11
Q

Define negative and affirmative covenants

A

Negative : prohibited to do
Affirmative : required to do

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12
Q

Define what a cross-default clause means

A

Covenant or contract clause that specifies that a borrower is considered in default when defaulting on another debt obligation.

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13
Q

What is a negative pledge clause ?

A

Limitations on investments, the disposals of assets or issuance of debt senior to existing obligations.

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14
Q

Difference between Callable vs Putable bond ?

A

A Callable bond is a bond for which the issuer (borrower) has an option to redeem prior to the normal maturity date. The earliest date is the call date. A Putable bond (or a put bond) is a bond for which the owner (lender) has an option to redeem prior to the normal maturity date. The earliest date is the put date.

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15
Q

Callable vs Putable bond prices ?

A

Callable > Putable

Callable bonds are more risky for investors than non-callable bonds because an investor whose bond has been called is often faced with reinvesting the money at a lower, less attractive rate. As a result, callable bonds often have a higher annual return to compensate for the risk that the bonds might be called early.

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16
Q

Yield-to-call ?

A

Internal rate of retun on cash flows received until the call of the bondn at a call price at a certain date.

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17
Q

Yield to worst ?

A

Lowest value of yield-to-call and yield-to-maturity. COMMON MEASURE FOR INVESTORS IN FIXED RATE CALLABLE BOND.

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18
Q

Corporate bond yield vs government bond yield ? and how to adjust the yield from corporate to government ?

A

Corporate : 30/360
Government : Actual/Actual day counts

Adjust by multiplying Corporate 30/360 X 365/360

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19
Q

What is a step-up coupon bond ?

A

A bond with a coupon rate that increases by specified margins at
one or more specified dates

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20
Q

What is the most common type of bond ?

A

The bullet bond. A bullet bond pays 100% of its face value plus a final interest
payment at the bond’s maturity.

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21
Q

What is a a partially amortizing bond ?

A

A bond characterized by a fixed periodic payment schedule that
reduces the bond’s outstanding principal to a portion of the principal to be
repaid on the maturity date.

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22
Q

Explain what a call provision is :

A

A call provision gives the issuer the right to redeem all or part
of the bond at a pre-determined price on specified dates. It is
a benefit to the issuer because if market interest rates fall, the
issuer can replace the callable bond with one with a lower
interest rate. It also gives the issuer added flexibility if it has
excess cash or wishes to change its capital structure in the
future.

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23
Q

Explain what a put provision is :

A

A put provision gives bondholders the right to sell
the bonds back to the issuer at a pre-determined
price on specified dates. The put provision is a
benefit to bondholders because it can protect
them from the risk of the price of the bond falling
from, for example, rising interest rates.

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24
Q

What are the characteristics of a Eurobond ?

A

Denoted in any currency, including the issuer’s domestic currency.

It is issued outside the jurisdiction of any single country.

It is usually unsecured.

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25
Q

What is the sources of payment for sovereign bonds ?

A

Taxes

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26
Q

What is the source of payment for unsecured corporate bonds ?

A

CFO

27
Q

What is the source of payment for secured corporate bonds ?

A

CFO
+
COLLATERAL CASH FLOWS or SALE

28
Q

What are the characteristics of a global bond ?

A

Issued in the Eurobond market and in at least in one domestic bond market ,ensuring suffcient demand for large bond issues and access to all fixed income investors (regardless of location)

29
Q

Differences between the global bonds and foreign bonds ?

A

Eurobonds can be issued anywhere globally, while foreign bonds are issued in a
specific foreign country. Investor Base: Eurobonds attract a broader international
investor base, while foreign bonds tend to be more targeted toward investors in the
country where they are issued

30
Q

What is a sinking fund ?

A

Provisions that reduce the credit risk of a bond
issue by requiring the issuer to retire a portion of
the bond’s principal outstanding each year

31
Q

What is the standard fixed coupon bond referred to ?

A

To as bullet bond

32
Q

Define the waterfull structures .

A

These represent the distribution order for
cash flows and risk to different tranches in a
financing structure

33
Q

There is always a balance between credit risk and reinvestment risk. Explain.

A

Credit risk happens when the bond is a bullet, which means it pays 100% of its face value plus a final interest
payment at the bond’s maturity. There is also reinvestment risk, the principal is repaid only at the end, investors face a reinvestment risk if interest rates drop by the time the bond matures. They may not be able to reinvest the principal at a comparable rate.

On the contrary, amortized bond face lower credit risk but more reinvestment risk.

34
Q

What bond has the higher reinvestment risk ?

A

Callable bonds

35
Q

How do sinking funds reduce credit risk ?

A

Like amortize bonds, reduce principal outstanding but there is still reinvestment risk.

36
Q

What are inflation-linked bonds ?

A

A type of index-linked bond that offer investors protection
against inflation by linking the bonds’ coupon payments
and/or the principal repayment to an index of consumer
prices. Also called linkers.

37
Q

Treasury Inflation Protected Securities are what except TIPS ?

A

US Treasury bonds with a principal that is adjusted for changes in
the Consumer Price Index. TIPS are issued in 5-, 10-, and 30-year
maturities.

38
Q

What is a deferred coupon bond ?

A

Bonds that pay no coupons for their first few years but then pay a higher coupon
than they otherwise normally would for the remainder of their life. Also called split
coupon bonds.

39
Q

What is a payment-in-kind feature for an issuer ?

A

Payment-in-kind feature allows an issuer to pay a bond or
loan interest coupon by increasing principal.

40
Q

What is a step-up coupon feature ?

A

A step-up coupon feature involves a coupon that increases by specified
margins at specified dates.

41
Q

What is the call risk ?

A

The uncertain maturity and limited price appreciation
associated with callable bonds.

42
Q

What is the call price ?

A

The price at which the issuer of a callable bond has the
right to purchase the bond from investors.

43
Q

True or false : callable bonds limit upside potential and poses reinvestment risk.

A

True that callable bonds limit upside potential and poses reinvestment risk.

44
Q

What is a warrant ?

A

Warrants are attached rather than embedded option.
Entitling the bondholder to buy the issuer’s stock at a
fixed exercise price until the expiration date. Warrants
are used as a yield enhancement to bond investors and
are traded separately in financial markets, such as the
Deutsche Börse and the Hong Kong Stock Exchange.

45
Q

What are contingent convertibles bonds and why were they created ?

A

Bonds that automatically convert to equity if a specific event or circumstance
occurs, such as the issuer’s equity capital falling below the minimum requirement
set by regulators.

CoCos were introduced in order to limit systemic risk, or the risk of
financial system failure. For this reason, CoCos offer investors a higher
yield than otherwise similar bonds. Note that the conversion is triggered
by a specific event, the breach of certain minimum regulatory capital
requirements, and not by certain equity or debt price levels

46
Q

How are bond interest taxed ?

A

Bond interest is taxed as ordinary income

47
Q

Define a domestic bond.

A

Bonds issued by entities that are incorporated in that country
are known as domestic bonds

48
Q

Definea foreign bond.

A

Bonds sold in a country and denominated in that
country’s currency by an entity from another country

49
Q

Define a Eurobond

A

Bonds issued outside the jurisdiction of any single country
are known as Eurobonds.

50
Q

Define a global bond

A

A bond issued simultaneously in the Eurobond
market and in at least one domestic bond market is known as a global bond.

51
Q

Why are there far more turnover in
fixed-income indexes than in equity indexes ?

A

Fixed-income indexes often have more constituent securities than equity indexes
because issuers tend to have many types of instruments outstanding, and governments
issue large amounts of fixed-income securities but not equity securities. The finite
maturity of bonds and the higher frequency of new issuance lead to far more turnover in
fixed-income indexes than in equity indexes. Fixed-income index constituents are
usually weighted by market value of debt outstanding, whereas equity indexes are
weighted by issuers’ market capitalizations.

52
Q

What is it : It includes fixed-coupon capital market securities from all major issuer types
in 28 developed and emerging markets that meet the inclusion criteria.
However, the index excludes high-yield and unrated debt instruments and
those that do not meet minimum issuance size.

A

Bloomberg Barclay’s GLOBAL aggregate index

53
Q

What is a shelf registration ?

A

Bonds can be sold via a private placement, in which only a select group of
investors or a single investor purchases the bonds. Bonds can also be sold
in a public offering in which any member of the public may buy the bonds.
Frequent bond issuers use a shelf registration, which is updated regularly
and may be used for a range of future bond issuances.

54
Q

The composition of broad bond indexes will most likely change due to
changes in

the maturity mix of issuers only.

the proportion of public versus private issuers only.

both the maturity mix of issuers and the proportion of public versus private
issuers.

A

both the maturity mix of issuers and the proportion of public versus private
issuers.

55
Q

What is a reopening

A

Issuing bonds by increasing the size of an existing bond issue with a
price significantly different from par.

56
Q

What is a fallen angel ?

A

Formerly investment-grade issuers whose credit quality has
deteriorated since the time of issuance.

56
Q

Fixed income secondary markets consist of what ?

A

Contrary to list equities with electronic exchanges as seconday markets, fixed income secondary markets are mostly quote-driven (MMs) or OTC markets.

56
Q

What is the most reliable source of short term funding for non financial corporations ?

A

Revolving Credit Agreement.

56
Q

A bond issue trading a its highest bid-offer spread is most likely what ?

A

A seasoned investment grade corporate bond, because bonds of less frequent issuers or more seasoned bonds of frequent issuers are rarely traded.

57
Q

What is a secured loan ?

A

Secured loans are loans in which the lender requires the company to
provide collateral in the form of an asset, such as a fixed asset that the
company owns or high-quality receivables or inventory. These assets are
pledged against the loan, and the lender files a security interest against
them. This pledge or lien is added to the borrowing company’s financial
record and reflected on its credit report. Companies that lack sufficient
credit quality to qualify for unsecured loans may attempt to obtain secured
loans.

58
Q

True or false : Short-term repos with high-quality collateral (lowest risk) result in the lowest return;
however, investors can expect higher returns for longer repo terms and/or by
accepting less liquid or lower quality collateral

A

True. Short-term repos with high-quality collateral (lowest risk) result in the lowest return;
however, investors can expect higher returns for longer repo terms and/or by
accepting less liquid or lower quality collateral

59
Q

What are the differences between an uncommitted and committed line of credit.

A

Must maintain a deposit at the bank. The least reliable. No upfront committment.

Sources of bank credit that a bank can refuse to honor. Uncommitted credit lines
are made up to a certain principal amount for a pre-determined maximum
maturity, charging a market reference rate plus an issuer-specific spread on only
the principal outstanding for the period of use.
rom a bank perspective, these uncommitted lines of credit serve as
valuable tools to maintain a long-term business relationship with the
borrower through which the bank can monitor borrower activity.

//

Committed (regular) line of credit

Involves an upfront payment.

are a more reliable source of financing than uncommitted lines because
they involve a formal written commitment.
Bank commitments to extend credit; the commitment is
considered a short-term liability and is usually in effect for 364
days (one day short of a full year).

60
Q

What are revolving credit agreements.

A

Different from committed but similar to uncommitted lines of credit in regard to the fact that it requires no upfront payment, they are in effect for multiple years (e.g., three to five years) and can
have optional medium-term loan features. Also known as revolvers.

61
Q

What is a factoring arrangement ?

A

When a company sells its accounts receivable to a lender (known as a factor) that
assumes responsibility for the credit-granting and collection process.

62
Q

What is the roll-over risk ?

A

In most cases, maturing commercial paper is paid with the proceeds of newly
issued commercial paper (or “rolled over”). This practice raises the possibility
that an issuer is unable to issue new paper at maturity, known as rollover risk.
To minimize rollover risk, investors usually require a committed backup line of
credit from banks, also referred to as a liquidity enhancement or backup
liquidity lines. The purpose of the backup lines of credit is to ensure that the
issuer can fully repay maturing commercial paper if a rollover is not possible.
Given their short maturity, commercial paper markets adapt quickly to adverse
credit events and defaults are relatively rare

63
Q
A

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