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CFA Level I > reading 43 > Flashcards

reading 43 Flashcards

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CFA flashcards
1
Q

what are the 3 major categories of investors in fixed income securities?

A
  • retail
  • institutional
  • central bank
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2
Q

central bank

A

directly invest in fixed income securities through open market, to implement monetary policy.

they purchase (sell) domestic bonds when they want to increase (decrease) the monetary-based in the economy

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3
Q

institutional investors

A

pension funds, hedge funds, charitable foundations, endowments, insurance companies, banks, and sovereign wealth funds.

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4
Q

retail investors

A

prefer to invest in fixed income securities because of the attractiveness of relatively stable price and steady income

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5
Q

fixed-income indices

A
  • fixed income index

- index construction (security selection & index weighting) varies among indices

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6
Q

fixed-income index

A

a multi-purpose tool used by investors & investment managers to describe a given bond market or sector and to evaluate investment manager performance

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7
Q

secondary bond market

A

markets in which existing bonds are subsequently traded among investors

  • called aftermarket
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8
Q

secondary market structure

A
  • otc (over the counter)

- organized exchanged

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9
Q

organized exchanged

A

a place where buyers and seller can meet to arrange their trade

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10
Q

OTC (over the counter)

A

buy and sell orders initiated from various locations are matched through a communication network.

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11
Q

liquidy in secondary market

A

refers to the ability to buy or sell bonds fast at price close to their fair market value

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12
Q

Settlement process

A

the bonds are delivered to the buyer and payment is received by the seller

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13
Q

secondary market for gov and quasi-gov settlement takes place on?

A

T+1 basis. the day after the transaction date

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14
Q

secondary market for corporate bond settlement takes place on?

A

T+3 basis.

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15
Q

what about cash settlement take place on?

A

the same day as trading.

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16
Q

settlement

A

process that happens after the trade is made

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17
Q

bid-offer spread (bid asked spread)

A

the price at which dealers will buy from a customer (bid) and sell to a customer (offer or ask) can be used to gauge the liquidity of the bond issues.

  • reasonable spread is 10-12 basis point.
    illiquidity spread may be greater than 50 basis points.
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18
Q

Retail deposits

A

Primary source of funding deposit-taking banks
- 2 main types include demand deposit & savings accounts

** the place you go to take and put money

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19
Q

Central bank funds market

A

allow banks that have a surplus of funds to loan money to banks that need funds (maturity up to one year)

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20
Q

Central bank funds rates

A

interest rates at which central bank funds are bought or sold.

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21
Q

Repurchase agreement (repo)

A

transaction in which 1 party sell a security to the other party, with an obligation to buy it back at an agreed-price and future date

22
Q

is the repurchase price greater than the sale price?

A

yes

23
Q

repurchase date

A

is future date

24
Q

overnight repo

A

repurchase agreement is one day

25
Q

term repo

A

agreement is for more than one day

26
Q

repo to maturity

A

agreement lasting until the financial maturity date

27
Q

repo agreements is used by whom?

A

by dealers firms and central banks in conducting their daily open market operations. they are also used to borrow securities to implement short position

28
Q

repo rate is

A

the difference between the repurchase price and the original sale price.

  • paid on the repurchase date (at the termination of the agreement)
29
Q

who does the paid coupon too belong too?

A

any coupon paid by the security during the repurchase agreement belongs to the seller of the security

30
Q

reverse repurchase agreement or repo

A

transaction in which 1 party purchases a security from the other party, with an obligation to sell it back at an agreed-on price (which is lower than the purchase price) and future date

31
Q

repo margin

A

the difference between the market value of the security used as collateral and the value of the loan.

  • HAIR CUT
  • serves as margin safety for lenders of funds if the collateral market value declines.
32
Q

what factors does the repo margin depends on

A
  • the length of the repurchase agreement
  • the quality of the collateral
  • the credit quality of the counterparty
  • the supply and demand conditions of the collateral
33
Q

what factors does repo rate depends on?

A
  • the risk associated with the collateral
  • the term of the repurchase agreement
  • the delivery requirement for the collateral
  • the supply and demand condition of the collateral
  • the interest rates of alternatives financing in the money market
34
Q

Short-term wholesales funds

A

includes:
- interbank funds
- certificates of deposit
- central bank funds

35
Q

Bilateral loans

A

loans from a single lender to a single borrower

36
Q

syndicate loans

A

loans from a group of lenders to a single borrower

37
Q

are bilateral and syndicate loans floating or not?

A

yes - floating, most of them

38
Q

what is interest rates based on for bilateral and syndicated loans?

A

interest rate is based on a reference rate plus a spread

39
Q

Commercial paper

A

short term - unsecured promissory note issued in the public market that represents a debt obligation of the issuer. not more than 270 days. usually 2 to 30 days.

40
Q

Commercial paper and its flexibility

A

-> leads it to have low-cost source of short term financing, and really available

41
Q

what is the connection between investors, commercial paper, and creditworthiness

A

investors are exposed to various level fo credit risk depending on the issuer creditworthiness

42
Q

what is rolling over the paper

A

new insurance of commercial paper to pay the existing one

43
Q

commercial paper - short dated maturity leads to

A

decrease in credit risk and increase number of issuers -> attractive commercial paper

44
Q

who issue the commercial paper

A

only the largest, most stable, highest-rated companies. issue low-cost commercial paper

45
Q

what is roll over risk

A

not be able to issue new commercial paper at maturity to meet redemption of maturing commercial paper

46
Q

what is the other name for backup lines of credit?

A

liquidity enhancement, or backup liqiduity lines

47
Q

serial maturity structure

A

maturity dates are spread out during the bonds life

48
Q

term maturity structure

A

notional pricipal is paid off in lump sum at maturity (more risk than serial maturity)

49
Q

is seniority ranking important for investors ?

A

yes

50
Q

short term maturity

A

<5 yr

51
Q

medium-term maturity

A

> 5 yr < 12 yr

52
Q

long term maturity

A

> 12 yr

CFA Level I (11 decks)

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