lecture 24 (1)

Question 1

The call option in the callable bond is exercised when the firm can

Answer 1

Buy the debt back at a price lower than the market price

If the trading price of the firm bonds is very low already, then the call provision of the bond is useless (it ends up out of the money)

This happens when the yield has increased from the issuance date

If the trading price of the firm bond is very high (yields are low) then the call option is very useful (the firm can rebuy its own debt at a lower) price

Question 2

Who pays for the benefits of the call provision

Answer 2

The creditors, who have to accept a low-price offer for an asset that is trading at a high price

Question 3

what is sovereign debt

Answer 3

government debt

Debt not issued by corporations: government treasury securities

Question 4

TIPS (treasury-inflation-protected securities)

Answer 4

When prices rise (there is inflation), the future principal is adjusted upward

Coupons are also adjusted for inflation

An inflation-index bond issued by the US treasury with maturities of 5, 10, 20 years

There are standard fixed rate coupon bonds with one difference: the outstanding principal is adjusted for inflation)

Question 5

Term loan

Answer 5

a bank loan that lasts for a specific term

Question 6

Revolving line of credit

Answer 6

a credit commitment for a specific time period, typically two to three years, which a company can use as needed

Question 7

Private placement

Answer 7

a bond issue that is sold to a small group of investors rather than the general public

Tradable among institutional investors

Question 8

Securities made up of other financial securities

Answer 8

securities cash flows come from the cash flows of the underlying financial securities that “back” it

Question 9

Asset securitization

Answer 9

the process of creating an asset-backed security

Question 10

mortgage-backed security

Answer 10

largest sector of the asset-backed security market

Backed by home mortgages

Larges issuers are US government agencies and sponsored enterprises, such as the government national mortgage association (GNMA)

Question 11

Student loan-backed securities

Answer 11

student loan marketing association

Question 12

covenants

Answer 12

restrictive clauses in a bond contract that limit the issuers from undercutting their ability to repay the bonds

Question 13

convertible bond

Answer 13

a corporate bond with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock

Question 14

Conversion ration

Answer 14

the number of shares received upon conversion of a convertible bond, usually stated per 1000$ of face value

Question 15

conversion price

Answer 15

the face value of a convertible bond divided by the number of shares received if the bond is converted