Fixed income intro

Question 1

Structure Securities (COE) are the combination of what types of securities?

Answer 1

Medium Term note + Derivative

Question 2

External and internal Credit Enhancement example:

Answer 2

External
Excess spread account
Surety bond (guarantee received, FDIC, FGC)

Internal
Overcollateralization

Question 3

What is the price that zero cupons bonds always sells? (Pure discount bonds)

Answer 3

Discount. “Below par value”
The interest accurual is the income of the investor, reaching to the Face Value

Question 4

Medium Term Notes are issued by?
Are they a medium term maturity?

Answer 4

Corporations debt
They are NOT a medium maturity.
Less liquidity

Question 5

REPO margin formula:
Is it Negociable?

What is the relation between REPO Marging and supply; demand And with quality of collateral?

Answer 5

Market Value - Loan amount
Yes. Bilaterally

⬇️ Short supply, ⬇️ REPO margin
⬆️High demand, ⬇️ REPO margin
⬆️ Quality, ⬆️ Repo Margin

Question 6

What the SPE does with securities?
(Special Purpose Entities)

Answer 6

Buy assets from the corporation;

Separates the “beans” - ones that is seeking financing ;

Create a securitized bond with higher credit rating

Question 7

Effects of increase in volatility in price of:
Callable Bond
Putable bond

Answer 7

Callable bond - Straight Bond + (-) written Call

🔝Vol , 🔝short Call ,🔻 Callable bond

Putable bond
Option Free (or straight) bond + long put
🔝Vol, 🔝 Long put , ⬆️ Putable bond

Question 8

What is a Straight Bond (or option free bond)?

Answer 8

Do not have contingency provisions

Question 9

Deferred Cupons Bonds are:
(From non payment to payment)

Answer 9

Carrying cupons

Intial payments are deferreds for some periods

Cupon Accrue

Pays a LUMP SUM at the end of that period

Pays regular cupons

Question 10

Spread formula and reasonable Value of liquid bonds spreads

Answer 10

Spread = Ask - Bid

Liquid: 10,12 basis

Question 11

Premium and discount trading:

Answer 11

Premium: PRICE > par value

Discount: Par value > Price

Question 12

When the par value (principal value) can change?

Answer 12

When the bond is indexed for inflation

(Pays cupon, inflation goes to the principal)

Question 13

Capital Market Securities are:

Answer 13

Maturity > 1 year

Question 14

Interbank Funds Market
Central Bank funds Market

Answer 14

Interbank= short term loans interbanks

CBFM = short term loans between banks and Central Bank

Question 15

Term Repo is short or long period?

Answer 15

Term repo = longer than Overnight rs

Question 16

Floating rate note should and shouldn’t match:

Answer 16

Should: currency, Reset frequency

Shouldn’t: Maturity

Question 17

NTN-B is similar with:

Answer 17

Capital- Index Bonds (treasury with Inflation)

Question 18

Negative and positive covenants:

Answer 18

Negative: prohibitives in nature
(Restrictions on sales, Additional Borrowings)

Positive: required to take, often administrative

(Comply with relevant laws to insure maintain assets)

Question 19

Eurobond
Global bond
Foreign bonds

Answer 19

EUROBONDS
Denominated in a currency other than that of the countries which they are issued

Ex: Brazilian Firm US DOLLAR denominated sold in…(other country than Brazil)

Tipically bearer bonds - The Trustee did not keep records of who owned the bonds (only the clearing knows)

GLOBALBONDS
Issued in the Eurobond market and
One domestic country simultaneously

Foreign bonds

Foreign company
Currency matches with the referred selling country (registered)

Domestic bonds
(Registered)

Question 20

Fixed Income Classifications:

Answer 20

By issuer: Corporate bonds (financial or non)

By cupons: Floating rate bonds

By maturity: Money market

Question 21

Partially amortizing
Fully amortizing
Bullet
Ballon
Plain Vanilla

Answer 21

Partially - Some of the principal is repaid before maturity (serial)

Note: amortizing structure, the amortization comes with the cupons.

Fully amortizing - Every payment has a amortization
Bonds outstanding principal amount at maturity = 0

Bullet - all principal is paid at maturity (no cupons) (term maturity)

Ballon - cupons + principal at maturity

Question 22

What is a interest rate cap?

Answer 22

Maximum rate that the issuer will pay even if the reference rate rises

Question 23

Identure, covenant are:

Answer 23

Indenture
Rights of bond holders
Obligations of issuer

Covenants
Specific provisions within indenture

Question 24

Settlement price for:
Government
Corporate
Money market

Answer 24

Government = (T + 1)
Corporate = (T+2 or T+3)
Money market = T+0 (cash settlement)

Question 25

Covenants specify:
When they are costly?

Answer 25

Rights of the bondholders
Actions issuer is obligated (positive) to perform
Or prohibited to perform (negative)

Costly when they are negative

Question 26

Covered bonds are:
Deferred cupons bonds allows:

Answer 26

Cover pool. (Segregated pool of assets)

If an assets included in that bond is not performing, the issuer must replace

Deferred: cash flow management
(Normally the assets does not generate income in the beginning, and the company can manage the interest payment)

Question 27

Credit Linked cupon (and others link)
Step up cupon bond
Dual-currency bond
Currency option bond

Answer 27

Credit:Cupon changes if credit rate changes
Inflation Link …

Step up : changes the cupon rates over time

Dual currency : Cupon Payments One currencie, par value other currencie

Currency option: boldholder have the right to decide which currency will receive principal and cupon

Question 28

Convertible Bonds conversion concepts
Ratio
Price
Premium
Value

Answer 28

Ratio = number of shares that each bond can be convertible

Price = Price per share that the convertible bond can be converted

Value = “parity value” : share Price x Conversion ratio
Ex. Current price 30, ratio 30:1= 900 $

Premium = convertible bond price - value

Question 29

Sinônimos of Vace value

Answer 29

Principal amount
Principal value
Redemption value
Par value
Nominal Value

Question 30

Tenor is:

Answer 30

The time remaining into maturity of the bond

Question 31

If a company buys a zero cupon bond, 20y what it should report?

What is the original issue discount value?

There is any tax deduction ?

Any gain or loss?

Answer 31

Taxable income every year
Original issue discount= par value - original issue price

No tax deduction, but increasing in costs

No gain or loss