Module 42.2: Bond Cash Flows and Contingencies Flashcards
What is an amortizing loan? fully amortizing?
when the periodic payments include principal and interest payments.
fully amortizing means that by the maturity date, principal is fully repaid.
what are sinking fund provisions?
provide the repayment of principal through a series of payments over the life of the issue. for example, may require the issuer to repay principal starting on the sixth year.
can be at par, or not par if the market price is less than the sinking fund redemption price.
What is an inverse floater?
has a coupon rate that increases when the reference rate decreases and decreases when the reference rate increases
what is a credit linked coupon bond?
rate will increase or decreased based on the credit rating of the issuer.
What are indexed linked bonds? Inflation linked bonds?
coupon payments are based on a commodity index. inflation linked bonds are most common index linked bonds that adjust for inflation based on the CPI.
What is a call option in a bond (i.e contingency provision)? Why is it valuable to the issuer?
gives the issuer the right to redeem all or part of the bond issued at a specific price.
valuable to issuer because it gives the right to redeem expensive debt and issue a new bond at lower cost.
What are the three styles of callable bonds? what are the differences?
american style - bonds can be called anytime after the first call date
european style - the bonds can only be called on the call date
bermuda style - the bonds can be called on specified dates after the first call date.
What is a make-whole provision?
to avoid higher interest rates on callable bonds, the call price is not dixed, but includes a lump sum payment based on the present value of the future coupons the bondholder will not receive if the bond is called early.
What are putable bonds?
gives the bondholder the right to sell the bond back to the issuing company at a prespecified price. because of this option, the putable bond will sell at a higher price.
what are contingent bonds?
convert from debt to equity if a specific event occurs.
