IPT 1 Chapter 14 Flashcards
What are fixed-income securities?
A claim on a specified periodic stream of income
What are the bond components”?
1, Face value
2. Maturity date
3. Coupon rate
4. Coupon Frequency
What are the different types of Treasure securities?
- Treasure bills: Maturity <1 year
- Treasure notes: maturity 1-10 year
- Treasure bonds: maturity of 10-30 years
What are different types of corporate bonds?
- Commercial paper
- Callable bonds
- Convertible bonds
- Puttable bonds
- Floating-rate bonds
- Serial bonds
What is a commercial paper?
Zero-coupon corporate bond with a very short maturity
What is a callable bond?
Allows issuer to repurchase bond at a specified call price before maturity (lower price)
What are the advantage to the firm and disadvantage to the lender of a callable bond?
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
What is a convertible bond?
Gives bondholders the option to exchange each bond for a specified number of shares of common stock of the firm (lower return)
What is the conversion ratio?
Number of shares for which each bond may be exchanged
What are puttable bonds?
Bondholders have the option to extend the maturity date or demand early repayment of principal (lower yield)
What are floating-rate bonds?
The coupon rate is adjusted at pre-specified dates to some benchmark rate
What is the advantage of floating-rate bonds?
They protect against interest rate risk
What are serial bonds?
Bonds with staggered maturity dates
What is the advantage to the holder and disadvantage of the issuer for serial bonds?
Advantage lender: It reduces default risk at maturity dates
Disadvantages issuer: Having to make prepayments
What are the recent bond market innovations?
- Cocos
- Preferred stock
- Catastrophe bonds
- Social impact bonds
- Securitized bonds
What are cocos?
Contingent convertible bonds that automatically convert into equity at predetermined distress trigger events
What is preferred stock?
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
What is catastrophe stock?
Principal is waived if a specified trigger of a natural disaster occurs
What is a social impact bonds?
Financial deals designed to deliver both a financial and a social return
What are securitized bonds
Bonds tied to expected cash flows from some underlying asset
What are examples securitized bonds?
CDO: Collateralized debt obligation
ABS: Asset backed securities
MBS: Mortgage-backed securities
What are the International type bonds?
- Foreign bonds
- Eurobonds
- Global bonds
- Dual currency bonds
What are flat prices?
Bonds quoted net of accrued interest
What is the invoice price?
Price that a buyer pays for bond including accrued interest
What is the advantage and disadvantage of current yield?
Advantage: Simplest notion of return
Disadvantage: Omits capital gains/losses from bond price changes
What is the advantages and disadvantage of YTM?
Advantage: More precise
Disadvantage: Assumes the coupon payments can be reinvested at the same rate and that the investor holds the bond until maturity
What are the disadvantages of holding period return?
Ex-post measure
Ignores reinvestment rate
What is the advantage of the Realized compound return?
Also an ex-post measure
What are the two types of methods for analyzing annualize bond yields?
- Bond equivalent yield
- Effective annual yield
What are the determinant of bond qualities?
- Coverage ratios
- Leverage ratios
- Liquidity ratios
- Profitability ratios
- Cash flow-to-debt ratio
What are the protective covenant of bond indentures?
- Sinking funds
- Subordination of further debt
- Dividend restrictions
- Ratio covenants
- Collateral
What are Credit default swaps?
An insurance policy on the default risk of a bond or loan
What are key parameters to price/rate securitized bonds?
- Default probability
- Correlation of defaults within portfolios
- Correlation of defaults across portfolios
- Collateral recovery rates for defaulted bonds
