Reading #52: Defining F/I Elements

Question 1

define corporation as bond issuer

Answer 1

issued by either financial or non financial companies

Question 2

define soverign national governments as bond issuer

Answer 2

many countries issue soverign bonds, ex is US Treasury

Question 3

define nonsoverign governments as bond issuer

Answer 3

issued by gov’t entities that are not antional gov’t, ex state of cali

Question 4

define quasi-gov’t entities as bond issuer

Answer 4

not direct obligation of country’s government or central bank, ex is Fannie MAe

Question 5

define supranational entity as bond issuer

Answer 5

issued by organizations that operate globally like IMF

Question 6

define perpetual bonds

Answer 6

bonds with no maturity date

Question 7

define money market securities

Answer 7

bonds with maturity less than 1 year

Question 8

define capital market securities

Answer 8

bonds with original maturities of over 1 year

Question 9

define “plain vanilla” or conventional bond

Answer 9

bond with fixed coupon rate

Question 10

define zero-coupon bonds or “pure discount” bonds

Answer 10

bonds that pay no interest prior to maturity

Question 11

define dual currency bond

Answer 11

coupon int. pymts in one currency and principal repayment at maturity in another currency

Question 12

define currency option bond

Answer 12

investor has choice which two currencies they want to receive pymts in

Question 13

define trust deed or “bond indenture”

Answer 13

legal contract btwn bond issuer and bondholder

Question 14

define negative covenants

Answer 14

provisions in indenture including restrictions on asset sales, negative pldge of collateral, additional borrowing (protects the bondholder)

Question 15

define affirmative covenants

Answer 15

provisions in indenture are to make timely int/primnicpal pymts to bond holders, to insure&maintain assets and to comply with applicable laws/regulations

Question 16

define domestic bonds verus national bond market versus foreign bonds

Answer 16

domestic- issued by country and trade in country’s currency. foreign bonds - issued by foreign country that trade in other country’s currency on the national bond market

Question 17

define eurobonds

Answer 17

issued outside jurisdiction of any one country and denominated in currency differnt from currency of countries they are sold

Question 18

define global bonds

Answer 18

eurobonds that trade in national ond market of cuountry other than country that issues the currency the bond is deonominated in

Question 19

bearer bonds versus registered bonds

Answer 19

bearer bonds is just evidenced by possessing bonds while registered bonds is recorded ownership

Question 20

Define SPE (special purpose entities), SPV or SPC (vehicle or company)

Answer 20

entities created for sole purposes of owning specific assets and issuing bond sto provide funds to purchase the assets

Question 21

define bankruptcy remote vehicles

Answer 21

another name for SPV because they can issue bonds at lower int. rate becuase they assets supporting the bonds are owned by the SPV

Question 22

define unsecured bonds

Answer 22

represent claim to overall assets and cash flows of the issuer

Question 23

define secured bonds

Answer 23

backed by a claim to specific assets of corp, reducing risk of default.

Question 24

define fixed income collateral

Answer 24

assets pledged to support a bond issue

Question 25

define equipment trust certificates

Answer 25

debt securites backed by equipment such as rilroad cars and oil drilling rigs

Question 26

define collateral trust bonds

Answer 26

backed by financial assets, such as sotcks and bonds

Question 27

define debentures and the trick for other countries

Answer 27

refers to unsecured debt in US and elsewhere, but GB and some other countries means bonds collateralized by specific assets

Question 28

define covered bonds

Answer 28

have obligation but firm and also added protection of pool of assets segregated into an SPV

Question 29

define credit enhancement

Answer 29

can be internal or external. overcollateralization - collagereal pledge is greater than par value, or excess spread, where yield on supporting asset greater than yield promised, or divide bond into tranches with different seniority claim

Question 30

define OID (original issue discount)

Answer 30

pure-discount bonds sold at significatn discounts to par. these bonds can generate large tax consequences

Question 31

define bullet structure of cash flows in bonds

Answer 31

periodict int. paymenets made over life of bond

Question 32

define a coupon

Answer 32

interest payments from bond

Question 33

define balloon payment

Answer 33

final payment including lump sum in additional to final interest

Question 34

amortizing, fully amortizing, partially amortizing

Answer 34

when periodic pament include boht interest and some principal. fully amortizing is when principal fully paid off when last periodic payment is made. partial is a mix between the two (but last pmt will reflect fully amortizing schedule)

Question 35

define sinking fund provision

Answer 35

pepayment of principal throuhg series of payments over life of the issue

Question 36

define advantages of sinking fund bonds

Answer 36

porivisions make it so there is less credit risk

Question 37

define disadvantages of sinking fund bonds

Answer 37

if int. rates fall, bonds trade at price above fund redemption price and bondholder can suffer loss is their bonds are chosen to be redeemed.

Question 38

define FRN (floating rate notes)

Answer 38

bonds that pay periodic interest depending on current market rate of interest

Question 39

define reference rate

Answer 39

market rate of interest. FRN promises to pay this plus some interset margin

Question 40

define varibale-rate note

Answer 40

note for which margin of reference rate is not fixed

Question 41

cap v. floor and who does it benefit?

Answer 41

cap places how high limit, benefits issuer and floor places how low limit, benefits the bondholder

Question 42

define invesrse floater

Answer 42

coupond rate increases when reference rate decreases and vice versa

Question 43

define step-up coupon bonds

Answer 43

coupon rates increase over time