LM 1: Fixed Income Features, Cash Flows, Issuance, & Trading Flashcards
What are fixed-income securities?
Dominant means of raising capital
What are the 2 types of bond issuers? GP
- Government and government-related sector
- Private Sector
What are the 4 different government and government-related sector bond issuers? SSNQ
- Supranational organizations
- Sovereign (national) governments
- Non-sovereign (local) governments
- Quasi-government entities
What are the 2 different private sector bond issuers? CS
- Corporations
- Special purpose entities that issue asset-backed securities
What is a supranational agency?
An international organization that represents a country or more (eg. United Nations)
What are sovereign bonds?
Bonds issued by the national government to fund spending when tax revenues are insufficient.
What are non-sovereign bonds, and what’s another word for non-sovereign bonds?
Bonds issued by states and cities
Often referred to as municipal bonds
What are quasi-government bonds?
Business entity that provides specific governmental services (eg. Federal National Mortgage Association)
What is tenor on bonds?
Time remaining on bond until maturity
What are bonds called that have less than one year until maturity and bonds with more than one year until maturity?
money market securities: bonds with less than 1 year until maturity
capital market securities: bonds with more than 1 year until maturity
What are perpetual bonds maturity?
bonds with no stated maturity
Is current yield higher or lower than the coupon rate when selling at a discount?
Current yield is higher than coupon rate when selling at discount
Is current yield higher or lower than the coupon rate when selling at a premium?
Current yield is lower than coupon rate when selling at a premium.
What type of interest rate does floating rate notes pay?
Interest rate changes based on performance of market reference rate (MRR)
What is a floored floating rate notes?
Note holder gets a minimum payment despite reference rate being below coupon floor. When reference rate is above coupon floor note holders gets coupon at reference rate
What is capped floating rate note?
Note holder receives coupon rate of the reference rate up until maximum point, if reference rate exceeds cap rate then investor recovers only the cap rate.
What is collard floating rate?
Note holder received coupon floor when rate is under coupon floor, when rate is above cap note holder received only the cap, when the reference rate is between both the cap and floor note holder gets reference rate coupon
What are zero coupon bonds?
No coupons paid on bond, investors purchase these bonds at discount and receive par value at maturity
What is the total interest earned formula on zero coupon bonds?
Total interest = par value - issue price
What are any contingency provisions embedded in the bond?
Anything about put options, call options, and convertible options on a bond
What is the relationship between a bond’s price and its yield?
inverse relationship
higher yield results in lower bond price
What 3 conditions must be met to earn the yield to maturity (IRR)? IPI
- issuer makes all payments as scheduled
- payments received before maturity are reinvested to earn the YTM
- investor holds the bond to maturity
What is the yield curve?
visual representation of how much it costs in terms of interest rate to borrow money for different periods of time.
eg. shows interest rates in U.S Treasuries debt at different maturities at a given point in time.
What is the trust deed or the bond indenture?
Describes obligations of bond issuer and rights of bond holder.