Fixed income intro Flashcards
Structure Securities (COE) are the combination of what types of securities?
Medium Term note + Derivative
External and internal Credit Enhancement example:
External
Excess spread account
Surety bond (guarantee received, FDIC, FGC)
Internal
Overcollateralization
What is the price that zero cupons bonds always sells? (Pure discount bonds)
Discount. “Below par value”
The interest accurual is the income of the investor, reaching to the Face Value
Medium Term Notes are issued by?
Are they a medium term maturity?
Corporations debt
They are NOT a medium maturity.
Less liquidity
REPO margin formula:
Is it Negociable?
What is the relation between REPO Marging and supply; demand And with quality of collateral?
Market Value - Loan amount
Yes. Bilaterally
⬇️ Short supply, ⬇️ REPO margin
⬆️High demand, ⬇️ REPO margin
⬆️ Quality, ⬆️ Repo Margin
What the SPE does with securities?
(Special Purpose Entities)
Buy assets from the corporation;
Separates the “beans” - ones that is seeking financing ;
Create a securitized bond with higher credit rating
Effects of increase in volatility in price of:
Callable Bond
Putable bond
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
What is a Straight Bond (or option free bond)?
Do not have contingency provisions
Deferred Cupons Bonds are:
(From non payment to payment)
Carrying cupons
Intial payments are deferreds for some periods
Cupon Accrue
Pays a LUMP SUM at the end of that period
Pays regular cupons
Spread formula and reasonable Value of liquid bonds spreads
Spread = Ask - Bid
Liquid: 10,12 basis
Premium and discount trading:
Premium: PRICE > par value
Discount: Par value > Price
When the par value (principal value) can change?
When the bond is indexed for inflation
(Pays cupon, inflation goes to the principal)
Capital Market Securities are:
Maturity > 1 year
Interbank Funds Market
Central Bank funds Market
Interbank= short term loans interbanks
CBFM = short term loans between banks and Central Bank
Term Repo is short or long period?
Term repo = longer than Overnight rs
Floating rate note should and shouldn’t match:
Should: currency, Reset frequency
Shouldn’t: Maturity
NTN-B is similar with:
Capital- Index Bonds (treasury with Inflation)
Negative and positive covenants:
Negative: prohibitives in nature
(Restrictions on sales, Additional Borrowings)
Positive: required to take, often administrative
(Comply with relevant laws to insure maintain assets)
Eurobond
Global bond
Foreign bonds
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)
Fixed Income Classifications:
By issuer: Corporate bonds (financial or non)
By cupons: Floating rate bonds
By maturity: Money market
Partially amortizing
Fully amortizing
Bullet
Ballon
Plain Vanilla
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
What is a interest rate cap?
Maximum rate that the issuer will pay even if the reference rate rises
Identure, covenant are:
Indenture
Rights of bond holders
Obligations of issuer
Covenants
Specific provisions within indenture
Settlement price for:
Government
Corporate
Money market
Government = (T + 1)
Corporate = (T+2 or T+3)
Money market = T+0 (cash settlement)
