RB CH14 - Bond Fundamentals Flashcards
Define the mechanics of a bond.
A fin.inst. that promises that the issuer (borrower) will pay the holder (investor) interest (coupon) and will repay the principal amount over a specified fixed period.
What is a GILT?
Bond issued by Govt. (typically the Bank of England and some other commonwealth countries)
What is the difference between Bearer Bonds and Registered Bonds?
Registered bond has its owner registered with issuer (details of owner kept).
Bearer bond owned by holder of physical bond. Coupons redeemed by submission of physical coupons.
What is the difference between Bearer Bonds and Registered Bonds?
Registered bond has its owner registered with issuer (details of owner kept).
Bearer bond owned by holder of physical bond. Coupons redeemed by submission of physical coupons.
Consider the relationship of the market interest rate and the coupon rate of a particular bond. Give the different scenarios possible.
Mkt i > coupon i : bond sells at discount
Mkt i < coupon i : bond sells at premium
Mkt i = coupon i : bond sells at mkt val.
What is the primary characteristic of the relationship between yields (interest rates) and bond prices? Consider why this the case.
Inverse relationship due to the structure of bonds. If yields were to rise above the yield of a particular bond then the bond price must reduce in order to increase it’s ytm to a competitive level.
What is a secured (senior) bond?
Bond that is backed by a legal claim on specified property
What is an unsecured bond (debenture)?
Bond backed only by issuer’s promise to pay interest and principal on timely basis
i.e. secured by general credit of issuer
What is a subordinated (junior) debenture?
Posses a claim on income and assets that is subordinated to other debentures
What is the indenture? Who ensures it’s provisions are met?
An indenture is the contract between issuer and holder specifying the legal requirements.
A trustee ensures it’s provisions are met
What is a non-refunding provision?
Prohibits a call and premature retirement of an issue if you are going to refinance with proceeds from a lower coupon bond
Who are the participating ISSUERS of the global bond-market structure?
Sovereigns Quasi govt (agencies) or foreign govt. Securitized/collateralize issues Corporations High-yield/emerging markets
Who are the participating INVESTORS of the global bond-market structure?
Individuals (minor) Institutional - Life insurance co. - Com. Banks - property and liability insurance companies - pension funds - mutual funds
What is the primary question in bond credit analysis?
Can the issuer service its debt timeously over the life of the issue
What is the difference between a foreign bond and a eurobond?
Foreign: bond sold in one country and currency by a borrower of different nationality
e.g. Yankee bonds
Samurai bonds
Eurobond: bond underwritten by an international syndicate and sold in several national markets
e.g. Euroyen bonds
Eurodollar, Eurosterling
What is a mortgage bond?
Grants holder lien on some piece of issuer property (good security)
What is an equipment trust certificate?
Large transportation firms use proceeds to purchase equipment which also serve as collateral
What is a collateral trust bond?
Pledge fin.ass.
What is a CMO?
Do investors own the CMO directly?
What serves as collateral for the CMO?
CMO is a special purpose entity that owns and administers the mortgage loans
by receiving the home owner’s payments and passing them on to investors.
The investors don’t own the CMO directly but own bonds issued by the CMO.
Mortgage loans underlying CMO serve as collateral for the investor owned bonds
Define CDO.
What do banks use them for (other than making money)?
A Collateralized debt obligation is a structured fin. product backed by a pool of loans (hence ‘collateralized’)
Banks use them to transfer the risk to the investor by creating tranches to sell.
Identify the 3 most important determinants of the price of a bond. Describe the effect of each
Market Interest rates (inverse relationship)
Time to maturity (direct relationship)
Coupon (direct relationship)
What does bond price volatility depend on?
Coupon and maturity; longer maturity and lower coupons are much more volatile
Name two indenture provisions that can effect the maturity of bonds.
A call option and a nonrefunding provision
What is the purpose of bond ratings?
To gauge default risk of the bond
