Fixed-Income Securities: Defining Elements

Question 1

The three important elements that an investor needs to know when investing in
a fixed- income security are:

Answer 1

(1) the bond’s features, which determine its scheduled cash flows and thus the bondholder’s expected and actual return; (2) the legal, regulatory, and tax considerations that apply to the contractual agreement
between the issuer and the bondholders; (3) the contingency provisions
that may affect the bond’s scheduled cash flows.

Question 2

Bonds such as _____ and _________ are connected to two currencies.

Answer 2

dual-currency bonds, currency option bonds

Question 3

Credit enhancement can be internal or external. Examples of _____ credit
enhancement include subordination, overcollateralization, and reserve
accounts. A bank guarantee, a surety bond, a letter of credit, and a cash collateral account are examples of ______ credit enhancement.

Answer 3

internal, external

Question 4

An ______ bond is a bond whose payment schedule requires periodic
payment of interest and repayment of principal. This differs from a ______
whose entire payment of principal occurs at maturity.

Answer 4

amortizing, bullet bond,

Question 5

_________ provide another approach to the periodic retirement of principal, in which an amount of the bond’s principal outstanding amount is usually repaid each year throughout the bond’s life or after a specified date.

Answer 5

Sinking fund agreements

Question 6

____ can be floored, capped, or collared. An inverse ____ is a bond whose coupon has an inverse relationship to the reference rate.

Answer 6

FRNs (floating- rate note, or floater)