Fixed-Income Securities Defining Elements Part 4

Question 1

Bullet Bond

Answer 1

The principal is paid all at once at maturity

Question 2

Fully amortized Bond

Answer 2

The principal is paid little by little in equal payments over a bond’s life so that it is repaid in full by the maturity date

Question 3

Partially amortized Bond

Answer 3

Only a part of the principal is repaid over the bond life.
The remaining big part is paid at maturity, making it a balloon payment

Question 4

Sinking fund arrangement

Answer 4

Allows for full or partial amortization of a bond prior to its maturity

Question 5

Types of sinking fund arrangements

Answer 5

Standard
accelerated
call provision

Question 6

Standard sinking fund arrangement

Answer 6

The issuer sends the repayment principal amount to the trustee

Question 7

Accelerated sinking fund arrangement

Answer 7

The issuer retires more than the specified portion of the bond notional principal

Question 8

Call provision

Answer 8

Gives the issuer the right to repurchase (call) the bond before maturity

Question 9

Results of sinking fund arrangement

Answer 9

Lower credit risk
higher reinvestment risk

Question 10

Lower credit risk

Answer 10

Sinking fund provision reduces credit risk for investors because the issuer does not have to pay a large payment at maturity

Question 11

Higher reinvestment risk

Answer 11

Receiving principal payments before maturity

Question 12

Fixed periodic coupons

Answer 12

Paid either semi-annually or annually

Question 13

Floating rate notes

Answer 13

A bond whose coupon is said based on some reference rate plus a spread
Has floors, caps, collars

Question 14

reference rate

Answer 14

an interest rate benchmark used to set other interest
rates.
Libor

Question 15

Inverse floating rate notes

Answer 15

A bond whose coupon has a negative relationship with the reference rate

Question 16

Floors

Answer 16

Minimum interest rate

Question 17

Caps

Answer 17

Maximum interest rate

Question 18

Collars

Answer 18

Both a minimum and maximum rate

Question 19

Step Up coupons

Answer 19

Coupons increase by specified amounts on specified date

Question 20

Bonds with credit-linked coupons

Answer 20

Coupons change when the issuer’s credit rating changes

Question 21

Bonds with payment-in-kind coupons

Answer 21

The issuer can pay coupons with additional amount of the bond issue instead of cash

Question 22

Index-linked bonds

Answer 22

Coupon payments or principal payments are linked to a price index

Question 23

Types of index-linked bonds

Answer 23

Zero-coupon-indexed Bond
interest-indexed bonds
capital-indexed bonds
indexed-annuity bonds