Fixed Income

Question 1

The higher the coupon rate, the _____ the price.

Answer 1

Higher

Question 2

Bond prices and yields are _______ related

Answer 2

Inversely

Question 3

True or false: The more risky the bond, the higher the yield required by investors to purchase the bond, and the lower the bond’s price.

Answer 3

True

Question 4

What are perpetual bonds?

Answer 4

Bonds with no maturity date?

Question 5

Define money market securities.

Answer 5

fixed-income securities that mature in less than one year from issuance

Question 6

Define capital market securities

Answer 6

fixed-income securities that mature in more than one year from issuance

Question 7

What is a currency option bond?

Answer 7

bonds that give bondholders a choice regarding which of the two currencies they would like to receive interest and principal payments in.

Question 8

What is a dual-currency bond?

Answer 8

makes coupon payments in one currency and the principal payment at maturity in another.

Question 9

What is the bond indenture and what does it contain?

Answer 9

The bond indenture (or trust deed) is the legal contract that describes the form of the bond, obligations of the issuer and the rights of the bondholders. It captures;

The name of the issuer
The principal value of the bond
the coupon rate
dates when interest payments will be made
the maturity date
fund sources for the interest payments and principal repayments 
Collaterals
Covenants
Credit enhancements

Question 10

Explain the difference between internal and external credit enhancements and give examples of each.

Answer 10

Internal focuses on the structure of the issue regarding priority of payment or the value of collateral. It includes: Subordination, Overcollateralization, and excess spread. External credit enhancement refers to guarantees received from a third-party guarantor. They include: surety bonds (issued by an insurance company) and bank guarantees as well as letters(lines) of credit.

Question 11

Explain the difference between affirmative and negative covenants

Answer 11

An affirmative covenant is a requirement made on the issuer which typically does not have a cost associated with it. A negative covenant is a restriction placed on the issuer and typically has some cost associated with it.

Question 12

Explain the difference between bullet and amortizing bonds.

Answer 12

A bullet bond only makes periodic interest payments, the principal is due at maturity. An amortizing bond makes periodic interest and principal payments.

Question 13

What is a sinking fund arrangement?

Answer 13

Required the issuer to repay a specified portion of the prinicipal amount every year throughout the bonds life or after a specified date. Also possible to have call option associated with the bond.

Question 14

Explain what a reverse (or inverse) floating-rate note is.

Answer 14

a bond where the periodic coupon rate is inversely related to the reference rate.

Question 15

What does PIK stand for and what does it mean?

Answer 15

Payment-In-Kind allows for issuers to pay interest in the form of additional bonds instead of cash.

Question 16

Explain the difference between traditional and contingent convertible bonds.

Answer 16

Unlike traditinoal convertible bonds, which are convertible at the option of the bondholder, CoCos convert automatically upon the occurence of a pre-specified event.

Unlike traditional convertible bonds, in which conversion occurs if the issuers share price increases, contingent write-down provisions are convertible on the downside.

Question 17

The interpolated spread or I-spread measures the yield spread of a bond over the appropriate:

Answer 17

Swap rate with the same tenor.