Fixed Income: Defining Elements Flashcards
Amortizing Bond
Bond with a payment schedule that calls for periodic payments of interest and repayments of principal
Asset-Backed Securities
A type of bond issued by a legal entity called a special purpose entity (SPE) on a collection of assets that SPE owns. Also securities backed by recievables and loans other than mortgages
Balloon Payment
Large payment required at maturity to retire a bonds outstanding principal amount.
Basis Point
Used in stating yield spreads, one basis point equals one-hundredth of a percentage point, or .01%
Bearer Bonds
Bonds for which ownership is not recorders; only the clearing system knows who the bond owner is.
Bond
Contractual agreement between the issuer and the bondholders.
Bullet Bond
Bond in which the principal repayment is made entirely at maturity.
Callable bond
A bond containing an embedded call option that gives he issuer the right to buy the bond back from the investor at specified prices on pre-determined dates.
Capital market securities
Securities with maturities at issuance long than one year
Cash collateral account
Form of external credit enhancement whereby the issuer immediately borrows the credit-enhancement amount and then invests that amount, usually is in highly ratted short-term commercial paper.
Collateral Trust Bonds
Bonds secured by securities such as common shares, other bonds, or other financial assets.
Collaterals
Assets or financial guarantees underlying a debt obligation that above and beyond the issuers promise to the pay.
Contingency Provision
Clause in a legal document that allows for some action if a specified event or circumstance occurs.
Contingent convertible bonds
Bonds that automatically convert into equity if a specific event or circumstance occurs, such as the issuer’s equity capital falling below the minimum requirement set by the regulators.
Conventional bond
Bond that makes periodic, fixed coupon payments during the bond’s life and a lump sum payment of principal at maturity.
Conversion price
For a convertible bond, the price per share at which the bond can be converted from cash into shares
Conversion ratio
For a convertible bond, or he number of common shares that each bond can be converted into.
Conversion Value
For a convertible bond, the current share price multiplied by the conversion ratio.
Convertible Bond
Bond that gives the bond holder the bond right to exchange the bond for a specified number of common shares in the issuing company.
Covenants
The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to perform (affirmative covenant) or prohibited from performing (negative covenant).
Covered Bond
Debt obligation secured by a segregated pool of assets called the cover pool. The issuer must maintain the value of the cover pool. In the event of default, bondholders have recourse against both the issuer and the cover pool
Credit enhancements
Provisions that may be used to reduce costs the credit risk of a bond issue.
Credit-linked coupon bond
Bond for which the coupon changes when the bonds credit rating changes
Credit Tranching
A structure used to redistribute the credit risk associated with the collateral; A set of bond classes created to allow investors a choice in the amount of credit risk that they prefer to bear.
Currency Option Bonds
Bonds that give the bond holder the right to choose the currency in which he or she wants to receive interest payments and principal repayments
Current Yield
The sum of the coupon payment received over the year divided by the flat price.
Debentures
Types of bond that can be secured or unsecured
Deferred Coupon Bond
Bonds that pays no coupons for its first few years but then pays a higher coupon than it otherwise normally would be for the remainder of its life
Dual currency bonds
Bonds that make coupon payments in one currency and pay the par value at maturity in another currency.
Embedded Option
Contingency provisions that provide the issuer or the bondholders the right, but not the obligation, to take action. These options are not part of the security and cannot be traded separately.
Equipment trust certificates
Bonds secured by specific types of equipment or physical assets
Eurobonds
Type of bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated
Floaters
A note on which interest payments are not fixed, but instead vary from period to period depending on the current level of a reference interest rate.
Floating-rate notes
A note in which interest payments are not fixed, but instead vary from period to period depending on the current level of a referenced interest rate.
Indenture
Legal contract that describes the form of a bond, the obligations of the issuer and the rights of the bondholders
Index-linked bonds
Bond for which coupon payments and/or principal repayment are linked to a specified index.
Inflation-linked bond
Type of index-linked bond that offers investors protection against inflation by linking the bonds coupon payments and or the principal repayment to an index of consumer prices
Letter of credit
Form of external credit enhancement whereby a financial institution provides the issuer with a credit line to reimburse any cash flow shortfalls from the assets backing the issue.
Linker
Type of index-linked bond that offers investors protection against inflation by linking the bond’s coupon payments and/or the principal repayment to an index of consumer prices
London interbank offered rare (Libor)
Collective name for multiple rates at which a selected set of banks believe they could borrow unsecured funds from other banks in the London interbank market for different currencies and different borrowing periods ranging from overnight to one year
Money market securities
Fixed-income securities with maturity at issuance of one year or less
Mortgage-backed securities
Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property
Overcollateralization
Form of internal credit enhancement that refers to the process of posting more collateral than needed to obtain or secure financing
Perpetual bonds
Bonds with no stated maturity date.
Plain vanilla bond
Bond that makes periodic, fixed coupon payments during the bond’a life and a lump-sum payment of principal at maturity
Principal
The amount of funds originally invested in a project or instrument; the face value to be paid at maturity
Principal Amount
Amount that an issuer agrees to repay the debt holders on maturity date.
Principal Value
Amount that an issuer agrees to repay the debt holder on the maturity date.
Pure discount bonds
Bonds that do not pay interest during the bonds life. It is issued at a discount to par value and redeemed at par.
Putable bonds
Bonds that give the bond holder the right to sell the bond back to the issuer at a predetermined price on specified dates.
Redemption yield
Annual return than an investor earns on a bond if the investor purchases the bond today and holds it until maturity. It is the discount rate that equates the present value of the bonds expected cash flows until maturity with the bonds price.
Registered Bonds
Bonds for which ownership is recorded by either name or serial number.
Reserve Accounts
Form of internal credit enhancement that relies on creating accounts and depositing in these accounts cash that can be used to absorb losses
Reserve funds
Form of internal credit enhancement that relies on creating accounts and depositing in these accounts cash that can be used to absorb losses
Running yield
The sum of the coupon payment received over the year divided by the flat price.
Secured bonds
Bonds secured by assets or financial guarantees pledged to ensure debt repayment in case of default.
Sinking Fund Arrangement
Provision that reduces the credit risk of a bond issue by requiring the issuer to retire a portion of the bonds principal outstanding each year.
Split coupon bond
Bond that pays no coupons for its first few years but then pays a higher coupon than it otherwise normally would for the remainder of its life.
Step-up Coupon
Bond for which the coupon, which may be fixed or floating, increases by specified margins at specified dates.
Subordination
Form of internal credit enhancement that relies on creating more than one bond tranche and ordering the claim priorities for ownership or increases retest in an asset between the tranches. The ordering of the claim priorities is called a senior/subordinate structure, where the tranches of highest seniority are called senior followed by subordinated or junior tranches
Surety Bond
Form of external credit enhancement whereby a rated and regulated insurance company guarantees to reimburse bondholders for any losses incurred up to maximum amount if the issuer defaults
Tenor
The time-to-maturity for a bond or derivative contract.
Trust Deed
The governing legal credit agreement, typically incorporated by reference in the prospectus.
Warrant
Attached option that gives its holder the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date
Yield to Maturity
Annual return that an investor earns on a bond if the investor purchases the bond today and holds it until maturity it is the discount rate that equates the present value of the bond’s expected cash flows until maturity with the bonds price.
Yield to redemption
Annual return that an investor earns on a bond if the investor purchases the bond today and holds it until maturity. It is the discount rate that equates the present value of the bonds expected cash flows until maturity with bonds price.
Zero-Coupon bonds
Bonds that do not pay interest during a bonds life. It is issued at a discount to par value and redeemed at par.
