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Fixed Income > MS > Flashcards

MS Flashcards

1
Q

What are the three main forces that drive the economy?

A

Productivity Growth

The short term debt cycle

The long term debt cycle

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2
Q

What does the central bank do?

A

They influence interest rates and print new money.

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3
Q

How do interest rates effect borrowing?

A

When interest rates are high there is less borrowing because it’s expensive.

When interest rates are low there is more borrowing because its cheaper.

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4
Q

How long are debt cycles?

A

Short term debt cycles are 5-8 years

Long term debt cycles are 75-100 years

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5
Q

What is the total credit in the US vs total money?

A

50 trillion credit, total money is 3 trillion

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6
Q

What does inflation do to interest rates?

A

inflation calls for higher interest rates

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7
Q

What happened in 2008?

A

Interest rates can’t be lowered to save the day. In the deleveraging you can’t lower interest rates because they are already low

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8
Q

What is the United States central bank?

A

The federal reserve

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9
Q

Who is the CEO of Morgan Stanley?

A

James Gorman

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10
Q

What are Morgan Stanley’s Core Values?

A

Do the right thing

Put clients first

Lead with exceptional ideas

Commit to diversity and inclusion

Give back

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11
Q

What is a yield curve?

A

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.

The slope of the yield curve gives an idea of future interest rate changes and economic activity.

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12
Q

what is the 10 year treasury note?

A

is a debt obligation issued by the united states government with a maturity of 10 years upon initial issuance.

a 10 year treasury note pays interest at a fixed rate once every six months and pays the face value to the holder of at maturity.

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13
Q

What is the U.S treasury 10 year rate?

A

.76%

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14
Q

What is a bond?

A

A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically a company or a government)

A bond can be thought of as an I.O.U between a lender and a borrower.

They are used to finance projects and operations.

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15
Q

How do bonds relate to the interest rate?

A

Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice versa.

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16
Q

What does the bond issuer do?

A

The bond issuer is the one that is borrowing the money.

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17
Q

What does the bond investor do?

A

The bond investor is loaning the money

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18
Q

What is the federal reserve?

A

The fed is the central bank of the united states.

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19
Q

What are the feds main duties?

A

The feds main duties include conducting national monetary policy, supervising and regulating banks maintaining financial stability, and providing banking services.

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20
Q

What is the default premium?

A

The difference between the yield on a corporate bond and the yield on a government bond with the same time to maturity to compensate the investor for the default risk of the corporation compared with the riskfree comparable government security.

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21
Q

What is the default risk?

A

This is the risk of a given company not being able to make its interest payments or pay back the principal amount of their debt. All else equal, the higher a company’s default risk, the higher the interest rate a lender will require it to pay.

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22
Q

What is face value?

A

Face value is the amount the bond issuer must pay back at the time of maturity bonds are usually issued with a 1,000 dollar face value.

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23
Q

What is the coupon payment?

A

The coupon payment is the interest payment a company will pay to holders of the bond/loan.

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24
Q

What is the difference between an investment grade bond a a junk bond?

A

An investment grade bond is one that has a good credit rating (AAA to BBB) and a low risk of default and therefore pays a low interest rate. There are usually low-risk , fundementally sound companies, which produce steady, reliable cash flows signifcantly greater than their interest requirements.

A junk Bond is one issued by a company that has a high risk of bankruptcy but is payng high interest payments.

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25
Q

What are the paralells between a bond and a loan?

A

The issuers are like the borrower and the holder of the bond are like the creditors.

26
Q

What is the difference between a corporate bond and a consumer loan?

A

The main difference is that a bond issuance is usually for a larger amount of capital and is sold in the public market and can be traded. A loan is issued by a bank and is not traded on a public market.

27
Q

How do you determine the discount rate on a bond?

A

The discount rate is determined by a company’s default risk. Some of the factors that influence the discount rate include a companys credit rating, the volatility of their cash flows, the interest rate on comparable U.S bonds, the amount of current debt outstanding, leverage and interest coverage.

28
Q

How do you price a bond.

A

The price of a bond is the net present value of all future cash flows (coupon payments and par value) expected from the bond using the current interest rate.

29
Q

If the bonds goes up what happens to the yield?

A

The price and yield move inversely with one another. Therefore when the price of a bond goes up the yield goes down.

30
Q

What should you do with bonds if you think itnerest rates will fall?

A

You should sell them. Bond prices rise when interest rates fall.

31
Q

What would cause the price of a treasury note to rise?

A

If the stock market is extremely volatile, and investors are fearful of losing money, they will desire risk free securities which are government bonds. The increase in demand for these securities will drive the price up and therefore the yield will fall.

32
Q

How many basis points equal .5 percent.

A

One basis point = .01 percent. therefore .5 =50 basis points.

33
Q

What is the order of creditor preference in the event of company bankruptcy?

A

The first creditors to get paid in the event of liquidation are the senior debt holders - usually banks and senior bondholders. They likely have some of the firm’s assets as collateral. Next come those holding subordinated debt, followed by preferred stockholders. Common stockholders have the last claim on assets in the event of liquidation or bankruptcy.

34
Q

Why would a company use bank debt rather than high yield bonds?

A

Bank debt is secured by the assets of the company and therefore normally commands lower interest rates. The tradeoff is that it will typically amortize and may have maintenance covenants.

35
Q

What are bond ratings?

A

A bond rating is a grade given to a bond according to its risk of defaulting.

The three best known and most trusted agencies are Standard Poor’s, Moodys , and Fitch.

The lower the grade the more speculative the stock and all things equal the higher the yield.

36
Q

What is the spot exchange rate?

A

The spot exchange rate is the rate of foreign exchange contract for immediate delivery. Spot rates are the price a buyer will pay “on the spot” for a foreign currency

37
Q

What is the forward exchange rate?

A

The forward exchange rate is what foreign currency is agreed to be worth at some time in the future. A company can enter into a forward contract on exchange rates to help hedge against exchange fluctuations

38
Q

What factors affect foreign exchange rates?

A

Differences in interest rates, differences in inflation, budget deficts, public debt, trade policies, capital market equilibrium.

39
Q

WHat is the difference between a strong and a weak currency?

A

A strong currency is one with a rising value relative to other currencies. A weak currncy has a falling value relative to other currencies.

40
Q

What is the yield to maturity on a bond?

A

Yield to maturity on a bond is its rate of return if held through its maturity date, based on its current price, coupon payments, face value, and maturity date.

41
Q

What will happen to the price of a bond if the fed raises interest rates?

A

If interest rates rise, newly ssued bonds offer higher yields to keep pace. This makes exisiting bonds with lower coupon payments less attractive, and their price must fall to raise the yield enough to compete with new bonds.

42
Q

What is the Euro Dollar Bond

A

A euro dollar bond is one issued by a foreign company but in U.S Dollars rather than the home currrency

43
Q

What is a callable bond?

A

A callable bond allows the issuer of the bond to redeem the bond prior to its maturity date, thus ending coupon payments. However, a premium is usually paid by the issuer to redeem the bond early.

44
Q

What is a put bond?

A

A put bond is essentially the opposite of a callable bond. A put bond gives the owner of the bond the right to force the issuer to buy back the security (usually at face value) prior to maturity.

45
Q

What is a convertible bond?

A

A convertible bond can be converted into equity during the bond’s lifetime. Therefore , the bond can be converted before maturity should the bondholder decide that the equity in the company is worth more than the bond.

46
Q

What is a perpetual bond?

A

A perpetual bond is a bond that simply pays a coupon payment indefintiely and never returns the principal amount.

47
Q

When should a company use debt instead of equity?

A

A company will normally refer to issue debt over equity because its cheaper than issuing equity. In addition interest payments are tax deductible and therefore provide tax shields. However, a company has to have a steady cash flow to make coupon payments, whereas that is not necessary when issuing equity. A company may also try to raise debt if it feels its stock is particulary undervalued such that an equity offering would not raise the capital needed.

48
Q

How can inflation hurt creditors?

A

Inflation can severely injure creditors. Creditors assign interest rates based on risk of default as well as the expected inflation rate. Creditors lending at 7% with inflation expected at 2% are expecting to make 5%. but if inflation actually increases to 4% they are only making 3%.

49
Q

If the stock market falls what would you expect to happen to bond prices and yields?

A

When the stock market falls, investors flee to safer securities like bonds. This increases the demand for those securities and therefore raises the price. Since price and yields move inversely if bond prices rise, their yields will fall. In that case, the government may lower interest rates in an attempt to stimulate the economy.

50
Q

What are some ways to determine if a company imposes a credit risk?

A

Determining a credit risk of a company takes an incredible amount of work and research. However some quick checks can include credit ratings from Moody’s and Standard and Poor’s the current ratio, quick ratio, interest coverage ratio, leverage ratio and debt to equity ratio, compared to those of similar companies in the same industry.

51
Q

What is ammortization?

A

If teh convertible bonds are “in the money” meaning the conversion price is below the current market price, then you account for the bonds as additional dilution to the equity value. Hwoever, if the bonds are out of the money, then you would account for them as debt at their face value.

52
Q

What steps can the fed take to influence the economy?

A

Open market operations (meaning the fed buying and selling securities(government bonds) to change the money supply.Buying government securuties increases the money supply

53
Q

What is a CDO?

A

A CDO is a collateralized Debt obligation. Which is a number of different kinds of debt packaged together and backed by different assets. (Different types are CBO’s and CLO’s)

54
Q

What is a MBS?

A

A MBS is a mortage backed security. A bundle od homeloans from the banks that issued them.

55
Q

What was MBS role in the financial crisis?

A

Banks lowered their lending standards and consumers jumped into the market. Subprime borrowers began to default and the hosuing markets began to collapse.

56
Q

What happens to interest rates when inflation is high?

A

The higher the interest rates the higher the inflation.

57
Q

What does a weak dollar do to inflation?

A

A weak dollar results in higher inflation.

58
Q

What’s Morgan Stanley Trading at?

A

about 48$

59
Q

Who is the CFO of Morgan Stanley?

A

John Pruzan

60
Q

What is Securitization?

A

The process of pooling together different kinds of debt. packaged bought securitized (pooled together) and sold.

61
Q

3 Stock Picks

A

Glu Mobile
AT&T
Square

Fixed Income (1 decks)

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