Fixed Income Flashcards
How can a corporation raise the required capital for a company?
1) issue a bond/debenture
2) issue preferred shares
3) issue common shares
how can the government raise capital?
1) issue a bond or debenture
2) issue t-bills
financial leverage
earning more money on capital borrowed than the interest you are paying on the loan
bonds vs debentures
bonds are secured and debentures are unsecured
Step-Up Bonds
bonds that have coupon rates that increase with time according to a specific schedule.
Callable Bonds
gives the issuer the option to call the bond before its maturity date.
Call Protection Period
the period between the initial issue date and the first potential call date.
Extendible Bond
has 2 potential maturity dates.
Convertible Bonds & Debentures
a convertible security allows the investor to lock in a specific price for common shares of the company.
Mortgage Bonds
a mortgage is a legal document that contains an agreement to pledge land, buildings, or equipment.
Floating-Rate Securities (Variable-Rate Securities)
they do not offer a fixed coupon rate. Interest rate’s are adjusted up or down at regular intervals.
Collateral Trust Bonds
bonds secured by stocks or bonds of companies that are controlled by the issuing company.
Subordinate Debentures
junior debentures ranks behind other debentures but before preferred shares in terms of entitlement. info found on prospectus.
Equipment Trust Certificates
equipment is pledged as collateral instead of real property.
Corporate Notes
is a short term unsecured promise to pay.
High Yield Bonds
junk bonds. speculative non-investment grade.
Commercial Paper
a promissory note issued by a corporation that is either unsecured or secured by a pool of financial assets. 3months - 1 year.
Bankers Acceptance
commercial draft guaranteed by a bank (30-90 days) sometimes as long as a year.
T-Bills
only interest earned is taxed. T-bills are sold at a discount and mature at FV.
Strip Bonds (Zero Coupon Bonds)
the spread between the purchase price and the maturity value is considered the investors’ interest which is taxable interest. sold at a discount and matures at FV. Traditional bonds just stripped of their coupons by the investment firm.
Domestic Bonds
all are the same
Foreign Bonds
an issuer is issuing a bond in a foreign country in that country’s foreign currency.
Eurobond
there are three countries involved, one for each of the 3 variables.
Yankee Bond
a CDN company issues a bond in the US in USD funds.
Liquidity, Negotiability, and Marketability
Liquidity: bonds that trade in significant volume.
Negotiability: refers to whether the bond is in good delivery form.
Marketability: bonds that have a ready market, which means that clients are willing to buy the bond b/c it has an attractive price and features.
Current Yield
=Annual Income/Current Market Price
Yield-To-Maturity (YTM)
=(Annual Income +/- Annual Price Change)/Avg. of market price and maturity price
Bond Pricing Properties
Interest rates and bond yields move in the same direction, with YTM always moving more than CY
5 bond pricing principles:
1) interest rates in the market and the market value of existing bonds are inversely related.
2) long-term bonds are affected more by interest rate changes than are high-coupon bonds.
3) low-coupon bonds are affected more by interest rate changes than are high coupon bonds.
4) the market value of a bond will also be impacted by the creditworthiness of the issuer.
5) yields move in the same direction as interest rates, with YTM always moving more.
Reinvestment risk
the YTM formula assumes that when interest payments are received they can be reinvested at the same interest rate.
Duration
simply a multiplier, and it tells you how much a bond’s price will change given a 1% change in market interest rates.
Liquidity Preference Theory
people usually lock up their money one if they are compensated by a higher interest rate.
Expectations Theory
suggests that in an efficient market, each of the choices are equally attractive b/c rates are not to influence a borrower’s decision.
Market Segmentation Theory
the big players are the one who really affect interest rate fluctuations.
banks and insurance companies
banks invest in the short term.
insurance companies invest in the long term.
