Fixed Income Instrument Features Flashcards

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1
Q

What are “Fixed-Income Instruments”?

A

Debt instruments such as loans or bonds.

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2
Q

What are “Loans”?

A

Debt instruments agreed to between a borrower and lender, typically a bank.

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3
Q

What are “Bonds”?

A

A contractual agreement between an issuer and bondholders.

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4
Q

What are “Fixed-Income Securities”?

A

Fixed-Income instruments designed to be more easily tradable than a loan (e.g., a bond).

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5
Q

What does “Principal” refer to?

A

The amount that an issuer agrees to repay the debtholders on the maturity date.

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6
Q

What is “Par Value”?

A

The amount of principal on the bond, also known as face value.

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7
Q

What is a “coupon”?

A

Periodic interest payments paid by a bond issuer to investors, typically expressed as a percentage of par on an annual basis.

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8
Q

What are “Asset-backed securities” (ABS)?

A

A type of bond issued by a legal entity called a special purpose entity created solely to own assets such as loans, receivables, and mortgages and to distribute flows to ABS investors.

ABS refers to non-mortgage ABS.

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9
Q

What is “maturity”?

A

The date of a fixed-income instrument’s final payment to investors?

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10
Q

What is a “Tenor”?

A

The remaining time to maturity for a bond or derivative contract. Also called term-to-maturity.

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11
Q

What are “Money Market Securities”?

A

Fixed-income securities with original maturities of one year or less.

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12
Q

What are “Capital Market Securities”?

A

Fixed-income securities with original maturities greater than one year.

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13
Q

What is “Face Value”?

A

The amount of principal on a bond, also known as “par value”.

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14
Q

What are “Floating-Rate Notes”?

A

Notes which interest payments are not fixed but instead vary from period-to-period depending on the current level of a reference interest rate.

Also known as “floaters”.

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15
Q

What is a “credit spread”?

A

The compensation for the risk of default in a debt security, typically measured by the yield-to-maturity difference between a bond and a comparable government benchmark security.

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16
Q

What are Zero-Coupon Bonds?

A

Bonds that do not pay interest during their life.

They are typically issued at a discount to par and then redeemed at par.

Also called “Pure Discount Bond”

17
Q

What is “Seniority”?

A

Priority of payment of various debt obligations.

18
Q

What is “Senior Debt”?

A

A debt obligation with higher priority than junior debt obligations.

19
Q

What is “junior debt”?

A

Debt obligations with lower payment priority than senior debt obligations.

20
Q

What is “subordinated debt”?

A

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

21
Q

What is a “Contingency Provision”?

A

Clause in a legal document that allows for some action if a specific event or circumstance occurs.

22
Q

What are “Embedded Options”?

A

Contingency provisions found in a bond’s indenture representing rights that enable their holders to take advantage of interest-rate movements.

They can be exercised by the issuer, by the bondholder, or automatically depending on the course of interest rates.

23
Q

What is a “current yield” (CY)?

A

The sum of the coupon payments received over the year divided by the flat price.

Also called “interest yield” or “running yield”.

24
Q

What is the “Yield Curve”?

A

a graphical depiction of yields-to-maturity of bonds from the same issuer across maturities.

25
Q

What is an “Indenture”?

A

a written contract between a lender and the borrower that specifies the terms of the loan, such as interest rate, interest payment schedule, or maturity.

26
Q

What does “Unsecured” mean?

A

It means “without collateral” and therefore is only backed by the cash flows of the issuer.

27
Q

What is a “Lien”

A

A legal right or claim to property by a creditor.

28
Q

What is a “Pledge”?

A

A legal right or claim to property by a creditor.

Also called a “Lien”.

29
Q

What does “Secured” mean?

A

it means “with collateral”

Debt is therefore backed by both cash flows of the issuer and the collateral as a secondary source of payment.

30
Q

What is “Collateral”?

A

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

31
Q

What are “Tranches”?

A

A group of securities within an issue with characteristics that vary from one another.

For example, different credit quality or seniority.

32
Q

What are “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 perform (affirmative covenant) or prohibited from performing (negative covenant).

33
Q

What is a “Pari Passu Clause”?

A

A covenant or contract clause that ensures a debt obligation is treated the same as the borrower’s other senior debt instruments and is not subordinated to similar obligations.

34
Q

What is a “Cross-Default Clause”?

A

Covenant or contract clause that specifies borrowers are considered in default if they default on another debt obligation.

35
Q

What is an “Incurrence Test”?

A

A financial ratio or other measurement taken prior to an action, such as a debt issuance, usually on a pro-forma basis taking the action into account.

The satisfaction of this test is linked to covenants between the issuer and investors.

36
Q

What is a “Negative Pledge Clause”?

A

Limitations on investments, the disposal of assets, or issuance of debt senior to existing obligations.

Negative covenants seek to ensure that the issuer maintains the ability to make interest and principal payments.