Fixed Income Securities

Question 1

Zero- coupon- indexed bonds

Answer 1

pay no coupon, so the inflation adjustment is made
via the principal repayment only: The principal amount to be repaid at maturity
increases in line with increases in the price index during the bond’s life. This
type of bond has been issued in Sweden

Question 2

Interest- indexed bonds

Answer 2

pay a fixed nominal principal amount at maturity but
an index- linked coupon during the bond’s life. Thus, the inflation adjustment
applies to the interest payments only. This is essentially a floating- rate note
in which reference rate is the inflation rate instead of a market rate such as
Euribor. These have been issued by insurance companies and major commercial
banks but not typically by governments.

Question 3

Capital- indexed bonds

Answer 3

pay a fixed coupon rate, but it is applied to a principal
amount that increases in line with increases in the index during the bond’s life.
Thus, both the interest payments and the principal repayment are adjusted for
inflation

Question 4

Indexed- annuity bonds

Answer 4

are fully amortized bonds, in contrast to interest indexed and capital- indexed bonds that are non- amortizing coupon bonds. The
annuity payment, which includes both payment of interest and repayment of
the principal, increases in line with inflation during the bond’s life.

Question 5

contingency provision

Answer 5

is a clause in a legal document that allows for some

action if the event or circumstance does occur

Question 6

Call premium

Answer 6

The call premium is the amount over par paid by the issuer if the bond is called

Question 7

Call protection period

Answer 7

The call protection period prohibits the issuer from calling a bond early in its life and
is often added as an incentive for investors to buy the bond. The earliest time that a
bond might be called is known as the call date

Question 8

Contingent convertible bonds

Answer 8

bonds with contingent write- down provisions. IN the case of CoCos, conversion is automatic if a specified event occurs

Question 9

Bonds Tenor

Answer 9

The tenor of the bond is the time remaining until the bond’s maturity date.

Question 10

Capital Market Security

Answer 10

A capital market security has an original maturity longer than one
year.

Question 11

Covered Bonds

Answer 11

is a debt obligation backed by a segregated pool of
assets called a “cover pool.” When the assets that are included in the cover pool
become non- performing (i.e., the assets are not generating the promised cash
flows), the issuer must replace them with performing assets.

Question 12

Open Market Operations

Answer 12

Open
market operations refer to the purchase or sale of bonds, usually sovereign bonds
issued by the national government. By purchasing (selling) domestic bonds, central
banks increase (decrease) the monetary base in the economy.

Question 13

Fixed- income markets

Answer 13

are dominated by institutional investors in part because of

the high informational barriers to entry and high minimum transaction sizes.

Question 14

Trading of Bonds

Answer 14

, the issuance and trading of bonds very often

occurs in over- the- counter (OTC) markets.

Question 15

How retail investors have exposure to fixed income securities

Answer 15

most retail investors prefer to use investment

vehicles, such as mutual funds and ETFs

Question 16

Primary Bond Markets

Answer 16

Primary bond markets are markets in which issuers initially sell bonds to investors
to raise capital.

Question 17

secondary bond markets

Answer 17

are markets in which existing

bonds are subsequently traded among investors

Question 18

firm commitment offering,

Answer 18

the investment bank guarantees the sale of the bond issue at an offering price that is
negotiated with the issuer. Thus, the investment bank, called the underwriter, takes
the risk associated with selling the bonds

Question 19

best effort offering,

Answer 19

he
investment bank only serves as a broker. It only tries to sell the bond issue at the
negotiated offering price if it is able to for a commission.

Question 20

The bid–offer spread or bid–ask spread

Answer 20

reflects the prices
at which dealers will buy from a customer (bid) and sell to a customer (offer or ask),
is very often used as an indicator of liquidity.

Question 21

organized exchange

Answer 21

provides a place
where buyers and sellers can meet to arrange their trades. Although buy or sell orders
may come from anywhere, the transaction must take place at the exchange according to the rules imposed by the exchange.

Question 22

Settlement

Answer 22

the process that occurs after the trade is made. The bonds are passed
to the buyer and payment is received by the seller

Question 23

Guaranteed Certificate

Answer 23

This combination of the zero- coupon

bond and the call option can be prepackaged as a structured financial instrument

Question 24

What protection does a Capital Protected Instruments give

Answer 24

The zero- coupon bond provides the investor capital
protection; at maturity, the investor will receive 100% of the capital invested even if
the call option expires worthless. The call option provides upside potential if the price
of the underlying asset rises and a limited downside if the price of the underlying asset
falls.

Question 25

Risks of Capital Protected Instruments

Answer 25

Note that the capital protection is only as
good as the issuer of the instrument. Should the issuer of guarantee certificates go
bankrupt, investors may lose their entire capital.

Question 26

Yield Enhancement Instruments

Answer 26

Yield enhancement refers to increasing risk exposure in the hope of realizing a higher
expected return

Question 27

Credit Linked Note

Answer 27

a type of bond that pays regular coupons but whose
redemption value depends on the occurrence of a well- defined credit event, such as a
rating downgrade or the default of an underlying asset, called the reference asset

Question 28

Benefits of CLN’s

Answer 28

If the
specified credit event does not occur, the investor receives the par value of the CLN at
maturity. But if the specified credit event occurs, the investor receives the par value of
the CLN minus the nominal value of the reference asset to which the CLN is linked.

Question 29

Issuers Benefits of CLN’s

Answer 29

A CLN allows the issuer to transfer the effect of a credit event to investors.

Question 30

Investors Benefits of CLN’s

Answer 30

. Investors
are willing to buy CLNs because these securities offer higher coupons than otherwise similar bonds. In addition, CLNs are usually issued at a discount.

Question 31

Participation Instruments

Answer 31

a participation instrument is one that allows investors to
participate in the return of an underlying asset.Most participation instruments are designed to give investors indirect exposure to
a specific index or asset price.

Question 32

Risks of Participation Instruments

Answer 32

x. In contrast to capital protected instruments that offer equity exposure,
these participation instruments usually do not offer capital protection

Question 33

Leveraged Instruments

Answer 33

Leveraged instruments are structured financial instruments created to magnify returns
and offer the possibility of high payoffs from small investments. An inverse floater is
an example of a leveraged instrument

Inverse floater coupon rate = C – (L × R)

Question 34

Deleveraged Inverse Floaters

Answer 34

Inverse floaters with a coupon leverage greater than zero but lower than one

Question 35

Leveraged Inverse Floaters

Answer 35

Inverse floaters with a coupon leverage greater

than one

Question 36

shelf registration

Answer 36

is a method for issuing securities in which the issuer files a
single document with regulators that describes and allows for a range of future
issuances. Allows certain authorized issuers to offer additional bonds to the general public without having to prepare a new and separate
offering circular.

Question 37

auction

Answer 37

is a public offering method that involves bidding, and that is helpful
in providing price discovery and in allocating securities. It is frequently used in
the issuance of sovereign bonds

Question 38

negotiable certificate of deposit (CD)

Answer 38

allows any depositor (initial
or subsequent) to sell the CD in the open market prior to maturity. A is incorrect because negotiable CDs are mostly available in large (not small) denominations

Question 39

the option- adjusted spread (OAS)

Answer 39

The option value in basis points per year is subtracted from the Z- spread

Question 40

Prepayment risk

Answer 40

the uncertainty that the cash flows will be different from the scheduled cash flows as set forth
in the loan agreement because of the borrowers’ ability to alter payments, usually to
take advantage of interest rate movements