Fixed Income: Fundamentals of credit analysis Flashcards

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1
Q

Bond Indenture

A

The governing legal credit agreement, typically incorporated by reference in the prospectus

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2
Q

Capacity

A

The ability of the borrower to make its debt payments on time

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3
Q

Capital Structure

A

The mix of debt and equity that a company uses to finance its business; a companies specific mixture of long-term financing

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4
Q

Change of control put

A

A covenant giving bondholders the right to require the issuer to buy back their debt, often at par or at some small premium to par value, in the event let that the borrower is acquired

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5
Q

Character

A

The quality of a debt issuers management

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6
Q

Collaterals

A

Assets or financial guarantees underlying a debt obligation that are above and beyond the issuers promise to pay.

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7
Q

Covenants

A

The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to performs (affirmative covenant) or prohibited from performing (negative covenant)

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8
Q

Credit curve

A

A curve showing the relationship between time to maturity and yield spread for an issuer with comparable bonds of various maturities outstanding, usually upward sloping.

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9
Q

Credit mitigation risk

A

The risk that a bond issuer’s creditworthiness deteriorates, or migrated lower, leading investors to believe the risk of default is higher.

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10
Q

Cross default provisions

A

Provisions whereby events of default such as non-payment of interest on one bond trigger default on all outstanding debt; implies the same default probability for all issues.

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11
Q

Default probability

A

The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security.

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12
Q

Default Risk

A

The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to terms of the debt security.

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13
Q

Downgrade Risk

A

The risk that a bonds issuer’s creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher

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14
Q

Expected loss

A

Default probability times loss severity given default

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15
Q

First lien debt

A

Debt secured by a pledge of certain assets that could include buildings, but may also include property and equipment, licenses, patents, brands etc.

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16
Q

First mortgage debt

A

Debt secured by a pledge of a specific property

17
Q

Limitations on liens

A

Meant to put limits on how much secured debt an issuer can have

18
Q

Loss severity

A

Portion of a bonds value (including unpaid interest) an investor loses in the event of default

19
Q

Maintenance covenants

A

Covenants in bank loan agreements that require the borrower to satisfy certain financing ratio test while the loan is outstanding

20
Q

Market liquidity risk

A

The risk that the price at which investors can actually transact-buying or selling- may differ from the price indicated in the market.

21
Q

Notching

A

Ratings adjustment methodology where specific issues from the same borrower may be assigned different credit ratings

22
Q

Pari passu

A

On an equal footing

23
Q

Priority of claims

A

Priority of payment, with the most senior or high ranking debt having the first claim on the cash flows and assets of the issuer

24
Q

Prospectus

A

The document that describes the terms of a new bond issue and helps investors perform their analysis on the issue

25
Q

Restricted payments

A

A bond covenant meant to protect creditors by limiting how much cash can be paid out to shareholders over time

26
Q

Second lien

A

A secured interest in the pledged assets that ranks below first lien debt in both collateral protection and priority of payment

27
Q

Secured debt

A

Debt in which the debt holder has a direct claim- a pledge from the issuer - on certain assets and their associated cash flows

28
Q

Seniority ranking

A

Priority of payment of various debt obligations

29
Q

Spread risk

A

Bond price risk arising from changes in the yield spread on credit-risky bonds; reflects changes in markets assessments and or pricing of credit migration (or downgrade) risk and market liquidity risk

30
Q

Structural subordination

A

Arises in a holding company structure when the debt of operating subsidiaries before funds can be passed to the holding company to service debt at the parent level

31
Q

Subordinated debt

A

A class of unsecured debt that ranks belies a firm’s senior unsecured obligations

32
Q

Trust deed

A

The governing legal credit agreement, typically incorporated by reference in the prospectus

33
Q

Unsecured debt

A

Debt which gives the debtholder only a general claim on an issuers assets and cash flow