Fixed-Income Securities Defining Elements Part 4 Flashcards
Bullet Bond
The principal is paid all at once at maturity
Fully amortized Bond
The principal is paid little by little in equal payments over a bond’s life so that it is repaid in full by the maturity date
Partially amortized Bond
Only a part of the principal is repaid over the bond life.
The remaining big part is paid at maturity, making it a balloon payment
Sinking fund arrangement
Allows for full or partial amortization of a bond prior to its maturity
Types of sinking fund arrangements
Standard
accelerated
call provision
Standard sinking fund arrangement
The issuer sends the repayment principal amount to the trustee
Accelerated sinking fund arrangement
The issuer retires more than the specified portion of the bond notional principal
Call provision
Gives the issuer the right to repurchase (call) the bond before maturity
Results of sinking fund arrangement
Lower credit risk
higher reinvestment risk
Lower credit risk
Sinking fund provision reduces credit risk for investors because the issuer does not have to pay a large payment at maturity
Higher reinvestment risk
Receiving principal payments before maturity
Fixed periodic coupons
Paid either semi-annually or annually
Floating rate notes
A bond whose coupon is said based on some reference rate plus a spread
Has floors, caps, collars
reference rate
an interest rate benchmark used to set other interest
rates.
Libor
Inverse floating rate notes
A bond whose coupon has a negative relationship with the reference rate