Fixed Income Part II Flashcards
Carrying Value
Value of the bond including its ammortized/discount amount as its approaches par.
Yield to Maturity is the rate of return to investors assuming:
- Coupon payments are reinvested at the YTM rate
- Bond is held to maturity or sold at price on the “constant yield price trajectory”
- Bond doesnt default
Is the IRR of a bond over the holding period. The Horizon yield= the initial YTM, unless the discount rate changes.
If the discount rate decreases, the reinvestment income lowers HOWEVER, the coupon over discount rate premium widens
The IRR of a bond over the holding period. The Horizon yield= the initial YTM, unless the discount rate changes.
If the discount rate decreases, the reinvestment income lowers HOWEVER, the coupon over discount rate premium widens
Interest rate risk is made up of what components
reinvestment risk and price risk
Horizon Yield
Annualized IRR of a bond accouting for compounded coupon payments reinvested at X rate
Pari Passu
All creditors with same seniority are treated equal
Cross Default
Borrower defaults on all outstanding debts if they default on 1
Negative pledge clause
Borrower can not issue any debt with higher priority
Bullet Bonds
Standard Bond. Regular coupon payments with principal paid at maturity
Sinkingfund
Portion of the principal payment is made into an escrow account
Bermuda Style Bonds
Issuer has right to call bonds at specified dates
Bearer Bonds
No registration for holders of the bonds. Only clearing house knows identity
Bond structures (taxes)?
Interest is taxed as income tax
Muni bonds can be exept of federal tax
High Yield
BB+ or lower
Typically underwritten with a Best effor offering approach
Repo (Repurchase Agrrement)
From borrowers perspective
Posts collateral, (Sells security and agrees to purchase back at a slightly higher price)
Haircut: The extent the loan is overcollateralized: Difference between collateral and borrowing amount
