Week 3 - Fixed income securities

Question 1

fixed income securities

Answer 1

promise a fixed stream of income over a specified period of time, in contrast to equity which has uncertain cashflows

Question 2

bonds

Answer 2

a debt security that is issued with a contractual agreement to pay back with interest over a specified payment schedule

Question 3

typical bonds

Answer 3

government treasury bonds, bills and notes
corporate bonds

Question 4

callable bonds

Answer 4

these allow the issuer to pay off their debt earlier than maturity

Question 5

puttable bonds

Answer 5

provide the bondholder the right but not the obligation to force the issuer to redeem the bond before its maturity
normally we can’t force them to pay off early, but this allows us to

Question 6

floating rate bonds

Answer 6

make interest payments tied to some measure of current market rates

Question 7

convertible bonds

Answer 7

give bondholders an option to exchange each bond for a specified number of shares of common stock of the firm

Question 8

preferred stock

Answer 8

they have higher claim priority than common stockholders
they promise to pay a specific stream of cash flows, but the failure to pay won’t lead to corporate bankruptcy

Question 9

yield to maturity

Answer 9

the IRR of a bond, the interest rate that makes the present value of the bonds cash flows equal to its price

Question 10

current yield

Answer 10

this is the bond market equivalent of dividend yield
it calculates how much income we get as a proportion of what we would have to currently pay to buy the bond

Question 11

yield curve

Answer 11

a graphical representation of the relationship between a yield on bonds of the same credit quality but different maturities

Question 12

rising vs downward sloping yield curve

Answer 12

rising - long term bonds offering yield higher than those of short term bonds
downward - long term bonds offering lower yields than short term bonds

Question 13

credit spread

Answer 13

the difference in yield between a US treasury bond and another debt security of the same maturity but different credit quality

Question 14

how are bonds rated?

Answer 14

rating agencies base their quality ratings largely on an analysis of the level of some of the issuers financial ratio’s

Question 15

coverage ratio

Answer 15

company earnings : fixed costs

Question 16

liquidity ratio

Answer 16

current assets : current liabilities

Question 17

leverage ratio

Answer 17

debt : equity