Fixed Income Securities Flashcards
Zero- coupon- indexed bonds
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
Interest- indexed bonds
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.
Capital- indexed bonds
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
Indexed- annuity bonds
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.
contingency provision
is a clause in a legal document that allows for some
action if the event or circumstance does occur
Call premium
The call premium is the amount over par paid by the issuer if the bond is called
Call protection period
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
Contingent convertible bonds
bonds with contingent write- down provisions. IN the case of CoCos, conversion is automatic if a specified event occurs
Bonds Tenor
The tenor of the bond is the time remaining until the bond’s maturity date.
Capital Market Security
A capital market security has an original maturity longer than one
year.
Covered Bonds
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.
Open Market Operations
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.
Fixed- income markets
are dominated by institutional investors in part because of
the high informational barriers to entry and high minimum transaction sizes.
Trading of Bonds
, the issuance and trading of bonds very often
occurs in over- the- counter (OTC) markets.
How retail investors have exposure to fixed income securities
most retail investors prefer to use investment
vehicles, such as mutual funds and ETFs
Primary Bond Markets
Primary bond markets are markets in which issuers initially sell bonds to investors
to raise capital.
secondary bond markets
are markets in which existing
bonds are subsequently traded among investors
firm commitment offering,
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
best effort offering,
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.
The bid–offer spread or bid–ask spread
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.
organized exchange
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.
Settlement
the process that occurs after the trade is made. The bonds are passed
to the buyer and payment is received by the seller
Guaranteed Certificate
This combination of the zero- coupon
bond and the call option can be prepackaged as a structured financial instrument
What protection does a Capital Protected Instruments give
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.
