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IPT1 > IPT 1 Chapter 14 > Flashcards

IPT 1 Chapter 14 Flashcards

1
Q

What are fixed-income securities?

A

A claim on a specified periodic stream of income

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2
Q

What are the bond components”?

A

1, Face value
2. Maturity date
3. Coupon rate
4. Coupon Frequency

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3
Q

What are the different types of Treasure securities?

A
  1. Treasure bills: Maturity <1 year
  2. Treasure notes: maturity 1-10 year
  3. Treasure bonds: maturity of 10-30 years
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4
Q

What are different types of corporate bonds?

A
  1. Commercial paper
  2. Callable bonds
  3. Convertible bonds
  4. Puttable bonds
  5. Floating-rate bonds
  6. Serial bonds
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5
Q

What is a commercial paper?

A

Zero-coupon corporate bond with a very short maturity

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6
Q

What is a callable bond?

A

Allows issuer to repurchase bond at a specified call price before maturity (lower price)

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7
Q

What are the advantage to the firm and disadvantage to the lender of a callable bond?

A

Advantage firm: It can refinance at lower interest rates when market rates fall
Disadvantage lender: Receive money back when interest rates are low and other investment opportunities are unattractive

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8
Q

What is a convertible bond?

A

Gives bondholders the option to exchange each bond for a specified number of shares of common stock of the firm (lower return)

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9
Q

What is the conversion ratio?

A

Number of shares for which each bond may be exchanged

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10
Q

What are puttable bonds?

A

Bondholders have the option to extend the maturity date or demand early repayment of principal (lower yield)

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11
Q

What are floating-rate bonds?

A

The coupon rate is adjusted at pre-specified dates to some benchmark rate

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12
Q

What is the advantage of floating-rate bonds?

A

They protect against interest rate risk

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13
Q

What are serial bonds?

A

Bonds with staggered maturity dates

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14
Q

What is the advantage to the holder and disadvantage of the issuer for serial bonds?

A

Advantage lender: It reduces default risk at maturity dates
Disadvantages issuer: Having to make prepayments

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15
Q

What are the recent bond market innovations?

A
  1. Cocos
  2. Preferred stock
  3. Catastrophe bonds
  4. Social impact bonds
  5. Securitized bonds
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16
Q

What are cocos?

A

Contingent convertible bonds that automatically convert into equity at predetermined distress trigger events

17
Q

What is preferred stock?

A

Stock with bond-like features that promises to pay at specified stream of dividends, has credit ratings and can be called, but missed payment does not trigger default

18
Q

What is catastrophe stock?

A

Principal is waived if a specified trigger of a natural disaster occurs

19
Q

What is a social impact bonds?

A

Financial deals designed to deliver both a financial and a social return

20
Q

What are securitized bonds

A

Bonds tied to expected cash flows from some underlying asset

21
Q

What are examples securitized bonds?

A

CDO: Collateralized debt obligation
ABS: Asset backed securities
MBS: Mortgage-backed securities

22
Q

What are the International type bonds?

A
  1. Foreign bonds
  2. Eurobonds
  3. Global bonds
  4. Dual currency bonds
23
Q

What are flat prices?

A

Bonds quoted net of accrued interest

24
Q

What is the invoice price?

A

Price that a buyer pays for bond including accrued interest

25
Q

What is the advantage and disadvantage of current yield?

A

Advantage: Simplest notion of return
Disadvantage: Omits capital gains/losses from bond price changes

26
Q

What is the advantages and disadvantage of YTM?

A

Advantage: More precise
Disadvantage: Assumes the coupon payments can be reinvested at the same rate and that the investor holds the bond until maturity

27
Q

What are the disadvantages of holding period return?

A

Ex-post measure
Ignores reinvestment rate

28
Q

What is the advantage of the Realized compound return?

A

Also an ex-post measure

29
Q

What are the two types of methods for analyzing annualize bond yields?

A
  1. Bond equivalent yield
  2. Effective annual yield
30
Q

What are the determinant of bond qualities?

A
  1. Coverage ratios
  2. Leverage ratios
  3. Liquidity ratios
  4. Profitability ratios
  5. Cash flow-to-debt ratio
31
Q

What are the protective covenant of bond indentures?

A
  1. Sinking funds
  2. Subordination of further debt
  3. Dividend restrictions
  4. Ratio covenants
  5. Collateral
32
Q

What are Credit default swaps?

A

An insurance policy on the default risk of a bond or loan

33
Q

What are key parameters to price/rate securitized bonds?

A
  1. Default probability
  2. Correlation of defaults within portfolios
  3. Correlation of defaults across portfolios
  4. Collateral recovery rates for defaulted bonds

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