Fixed Income

Question 1

Key features specified in a fixed-income security

Answer 1

• Issuer
• Maturity
• Principal (par or face value)
• Coupon rate and periodicity
• Seniority
• Contingency provisions (embedded options)

Question 2

Bond indenture (a.k.a. Trust deed)

Answer 2

The legal contract between the bond issuer and bondholders. It specifies obligations, and restrictions on the borrower, including sources of repayment etc. It forms the basis of all future interactions between bondholders and the issuer.

Question 3

Affirmative convenants

Answer 3

Bond indenture obligations which specify requirements that the issuer must fulfil.

Question 4

Negative convenants

Answer 4

Bond indenture obligations which place restrictions on the issuer in terms of not performing certain actions.

Question 5

Trustee

Answer 5

An independent third party, typically a financial institution, appointed by the issuer to represent and protect the interests of bondholders by ensuring the issuer complies with the terms and conditions set out in the bond indenture.

Question 6

Bullet structure

Answer 6

A bond repayment structure in which the principal is paid back in a single payment at maturity. Periodic payments over the lifespan of the bond are solely interest payments.

Question 7

Amortising loan

Answer 7

A loan structure in which periodic payments include both interest and some repayment of principal. It can be fully amortising or partially amortising, where some repayment of principal is needed on maturity (referred to as ballon payment).

Question 8

Sinking fund provisions

Answer 8

Provisions in the bond indenture which make an amortisation schedule such that principal is repaid through a series of payments over the life of a bond issue.

Question 9

Waterfall structure

Answer 9

Amortisation structure used to establish principal repayments to holders of ABSs and MBSs. These structured products are split into tranches of varying seniorities, and the seniority determines the order of priority in principal repayments.

Question 10

Floating-rate notes

Answer 10

Bonds whose periodic interest payments depend on prevailing market interest rates at the time of payment.

Question 11

Step-up coupons

Answer 11

A coupon structure under which the coupon rate increases over time according to a pre-determined schedule, providing protection to investors against the rise of interest rates during the life of the bond issue.

Question 12

Payment-in-kind (PIK) bonds

Answer 12

Allow the issuer to make coupon payments by increasing the principal amount of the outstanding bonds, thus essentially paying bond interest with more bonds.

Question 13

Green bonds

Answer 13

Coupon paid increases if certain environmental goals are not met by the issuer.

Question 14

Index-linked bonds

Answer 14

Bonds that have either coupon payments or principal value that is based on a specified public index.

Question 15

Inflation-linked bonds

Answer 15

Index-linked bonds which increase their cash flows to investors based on some price level index. With interest-indexed bonds, the coupon rate is adjusted for inflation. With capital-indexed bonds (most common structure), the coupon rate is constant, but the principal value is adjusted for the rate of inflation.

Question 16

Deferred-coupon bond

Answer 16

Bond with a coupon payment structure which arranges for regular coupon payments to begin at a later specified date after issuance.

Question 17

Contingency provisions

Answer 17

A feature added to contracts that describes an action which may be taken if a certain event occurs. When they are in a bond indenture, they are referred to as embedded options.

Question 18

Callable bond

Answer 18

A bond which gives the issuer the right, but not the obligation, to redeem all or part of a bond issue at a predetermined fixed price. The period before which this embedded option is exercisable is called call protection period.

Question 19

Putable bond

Answer 19

A bond which gives the bondholder the right, but not the obligation, to sell the bond back to the issuer at a predetermined fixed price (typically par).

Question 20

Convertible bond

Answer 20

A bond which gives the bondholder the option to exchange the bond for a specified number of shares of the issuing corporation’s common stock.

Question 21

Warrants

Answer 21

Warrants are instruments attachable to bonds upon issuance which give their holders the right to buy common shares of the issuing company at a specified price.

Question 22

Contingent convertible bonds (CoCos)

Answer 22

Bonds that convert from debt to common equity automatically if a specific event occurs.

Question 23

Domestic bonds

Answer 23

Bonds of issuers domiciled in the same country as the market in which the bonds are issued and traded.

Question 24

Foreign bonds

Answer 24

Bonds of issuers from countries other than the market in which the bond trades

Question 25

Eurobonds

Answer 25

Bonds issued internationally, outside the jurisdiction of any single country, and typically denominated in a currency different from the currency of the country where they are issued. Imagine a bond of a Chinese company issued in USD, and traded on markets outside of the USA.

Question 26

Global bonds

Answer 26

Eurobonds which trade in at least one domestic bond market and in the Eurobond market.

Question 27

Bearer and registered bonds

Answer 27

Bearer bond ownership is not officially recorded by the issuer, therefore ownership is proven by possession in time of coupon payment and/or repayment.

Question 28

International bonds

Answer 28

Collective name for foreign bonds, global bonds, and Eurobonds that involve more than one country.

Question 29

Sukuk bonds

Answer 29

Sharia-compliant bonds with specific restrictions in the payment of interest and use of the proceeds of the bond issue. The periodic payments on these bonds are considered to be cash flows from rent on underlying assets.

Question 30

Original issue discount bonds (OIDs)

Answer 30

Zero-coupon and other bonds sold at significant discounts to par when issued. Because gains over an OID bond's tenor as its price moves toward par value are really interest income, these bonds can generate tax liabilities even when no cash payments have been made.