Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Unit 2: Securities > 2.2 Debt types and features > Flashcards

2.2 Debt types and features Flashcards

1
Q

What options do companies vs governments have for raising capital?

A

Companies: debt and equity

Governments: Debt only

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Can governments use bank loans to raise capital?

A

No - only companies have this option

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the two types of debt securities and their respective maturities?

A

Bills: <1 year
Bonds: >1 year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the difference between capital markets and money markets?

A

Capital markets: Long-term issuance, generally >1year; (bonds)

Money markets: Short-term issuance, generally <1year; (bills)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the 4 main features of a bond?

A
  1. Coupon - represents interest (expressed as annual percentage per £100 of nominal value)
  2. Nominal value - capital payment holder receives at redemption (not the price of the bond!)
  3. Name - name given at issue (common for governments to refer to their bonds as treasury stock/bonds)
  4. Redemption - the year and date when the gilt is repaid (maturity date)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How often can coupons be paid?

A

On an annual or semi-annual basis

  • UK Government pays coupon on semi-annual basis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are other names for the nominal value of a bond?

A

Par/redemption/capital
value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Why is the coupon of a bond often called the gross coupn?

A

Coupons are taxable (subject to income tax for individuals); but tax
is not normally deducted from the coupon payment -0 therefore it is referred to as being a gross coupon.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Who is responsible for debt and cash management for the UK government?

A

The Debt Management Office (DMO)

  • they repay capital to investor at redemption of a bond
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the yield on UK Gilts considered?

A

UK Gilts are effectively credit risk free and are therefore used for benchmarking - their yield is considered the risk-free rate for sterling denominated bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the two main types of UK government bond?

A
  • Conventional
  • Index linked
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the features of a conventional government bond?

A
  • fixed coupons
  • fixed maturity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is a disadvantage of conventional gov. bonds?

A

If invested for a long period of time cashflows (coupon and nominal value) can be very easily eroded by inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the features of an index-linked government bond?

A
  • coupon and nominal value linked to inflation index
  • therefore inflation protected
  • NOTE: no deflation protection
  • stated cashflows (coupon and nominal value) will be returned in the case of zero-inflation since investing in the bond
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Do index-linked bonds have higher or lower yield than conventional?

A
  • Lower yields as they provide additional safety so are lower risk (and therefore lower potential return)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the RPI?

A

Retail Prices Index - An average change in the prices of household
goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the CPI?

A

Consumer Prices Index: Based on an EU-wide formula to allow
international comparison. Used by the MPC (monetary policy committee)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the PPI?

A

Producer Prices Index: Looks at goods and services further up the
production chain, at the wholesale level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What does STRIPS stand for?

A

Separate Trading of Registered Interest and Principal of Securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is a zero-coupon bond?

A

A bond issued at a discount to the nominal value - later redeemed at nominal value (pays no coupon)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is a key benefit of zero coupon bonds?

A

It removes reinvestment risk as investors can precisely match their liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Which firms dominate the zero-coupon market?

A

Large institution investors, insurance companies, pension funds - who have liabilities to meet

aka. Liability driven investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Do UK and US governments issue zero-coupon bonds?

A

UK and US governments have historically never issued zero-coupon bonds in the capital market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How do the UK and US provide investors with zero-coupon bonds in another way?

A

Through the STRIPS market developed in US and UK treasury market

Designate certain UK Gilts to be strippable by the DMO - take all the cash flows of a gilt and turn it into a mini-zero coupon bond (STRIPS)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Which 3 parties in the UK are permitted to strip Gilts and create the zero-coupons?
GEMMs - Gilt-Edged Market Makers HMT BoE
26
How many STRIPS can a 5 year strippable Gilt be stripped into?
11 - it is the number of years x2 (to get the coupon cash flows) + 1 (to get the capital payment cash flow)
27
What is reinvestment risk and how can it be avoided?
- Where the investor may not receive a required rate of return when reinvesting coupon payments - Often avoided through cash-flow matching, or dedication
28
What is dedication?
Where the investor matches the maturity of cash-flows to the liabilities - Simplest way to do this is use a zero-coupon bond
29
What are the features of French government bonds?
Legal form - bearer Life when issued - OATs: 2-50 years Coupons - annual Settlement time - T+2
30
What are the features of German government bonds?
Legal form - bearer Life when issued - Schatz: Up to 2 years Bobl: 5 years Bund: >10 years Coupons - annual Settlement time - T+2
31
What are the features of UK government bonds?
Legal form - registered Life when issued - Short: < 7 years Medium: 7-15 years Long: >15 years Coupons - semi-annual Settlement time - T+1
32
What are the features of US government bonds?
Legal form - registered Life when issued - T-notes: 2-10 years T-bonds: >10 years Coupons - semi-annual Settlement time - T+1
33
What are the features of Japanese government bonds?
Legal form - registered or bearer Life when issued - Maturities tend to be anywhere between 2-40 years Long: 10 years (most common) Superlong: 20 years Coupons - semi-annual Settlement time - T+1
34
Where has a significant increase in issuance of government bonds been observed and what is a downfall?
In emerging/frontier markets: - increased volatility and uncertainty
35
List the emerging markets
Brazil, Russia, India, China, South Africa, Indonesia, Mexico, Turkey and Malaysia
36
List the frontier markets
Bangladesh, Bahrain, Mauritius and Sri Lanka
37
What are the two main types of corporate bonds?
- secured debt securities - unsecured debt securities
38
What are the 2 types of secured corporate bonds?
- Fixed charge over assets - Floating charge over assets
39
What are fixed charge over assets secured bonds?
a fixed charge is security over a certain specific (named) company asset, e.g. a building or land, and is the most common form of security for debentures A mortgage charge is a type of fixed charge
40
What are floating charge over assets secured bonds?
security over a class (pool) of assets, e.g. plant and machinery, fixtures and fittings, trade debtors, inventory, receivables
41
What is another term for unsecured debt?
Loan stock
42
What is an unsecured debt transaction called in the UK?
A debenture
43
What does debenture refer to in the US?
Generally refers to a loan agreement with no security at all
44
What terms does the US use for secured issues and secured debt?
Secured issue: asset-backed security Secured debt: asset backed security (ABS)
45
List corporate bonds in order of least to most risky
1. fixed charge over assets secured bond 2. floating charge over assets secured bond 3. unsecured bond
46
What is the difference between ABS and covered bonds?
The difference comes from who owns the pool of assets: - if owned by the originator (eg. the bank that lent out money for mortgage in first place): covered bond - if owned by a SPV (sold on by bank to SPV whose purpose is to securitise the bond)
47
What does it mean to securitise something?
Turn it into a security (take smt difficult to trade and turn it into smt easy to trade)
48
What is a trust deed?
Empowers trustee alone to act on behalf of debenture holders (for ABS) - ensures organised action and parity of treatment through a single entity
49
What is the role of the trustee?
Protect interests of debenture holders
50
What is a note trustee?
- Appointed to represent the interests of holders of issues of securities - also provides guidance to the issuer
51
What is a security trustee?
- takes legal control of assets; assets re-registered in trustee's name - Where bonds are secured (debentures) the security is protected by the trustee for the benefit secured parties - The governing documents dictate the order of priority of payments among the entitled parties
52
What is a share trustee?
- Holds the shares in an issuing Special Purpose Vehicle (SPV) in order to ensure off-balance-sheet treatment for the originator of the transaction - Share trustee becomes legal owner of SPV - Sometimes these SPVs are domiciled in offshore jurisdictions
53
What is a successor trustee?
This role played by a trustee is provided for banks which need to resign because of conflicts of interest (especially in connection with defaulted or bankrupt issues) or when work requirements exceed the bank’s capacity
54
What is the typical life of unsecured corporate bonds?
7-30 years
55
What are the 5 types of unsecured debt with different features to conventional bonds?
- convertible bonds - exchangeable bonds - guaranteed bonds - Floating rate notes (FRNs) - Payment in kind notes (PIK)
56
What is a convertible bond?
Choice to convert into stock of the issuer (at discretion of investor)
57
What is an exchangeable bond?
Converts into stock of another (usually subsidiary of issuer)
58
What is a guaranteed bond?
Credit enhancement based on credit rating of a third party (a guarantor) So investors know that there is a bigger/better company than the issuer that is guaranteeing the debt - this is a safer bond (less risk) and therefore reduces financing cost for issuer (can issue more cheaply)
59
What are floating rate notes?
- variable coupon - coupon floats in line with market interest rates - trades near par (price = nominal value usually) so you dont have the inverse relationship between interests rates and bond prices - capital protection as it trades near par (less risk of loss of capital)
60
What are PIKs?
- generally subordinated debt - zero coupon bonds that are issued at substantial discount to face value
61
What is a Eurobond?
- international bonds issued in more than 1 country - bearer documents - issued in eurocurrency
62
What is eurocurrency?
- any currency other than the currency of the market in which the eurobond is issued
63
Where are eurobonds typically dealt?
Usually OTC but some are exchange traded
64
Who regulates Eurobonds and what is settlement period?
International Capital Markets Association (ICMA) - trades reported and matched through TRAX - settlement is T+2(if settled through euroclear/clearstream)
65
What is the day count convention for accrued interest on eurobonds?
30/360
66
Is the coupon taxed for a eurobond and how often are they issued ?
No - its a gross annual coupon
67
What does it mean to immobilise a bearer document?
Put in a depositary (eg. Euroclear/clearstream
68
What is the order of payout in the case of liquidation?
1. Liquidator 2. Fixed charge holders (Fixed charge debentures) 3. Preferential creditors (eg. employees) 4. Floating charge holders 5. Unsecured creditors (eg. trade creditors and the government, unsecured bonds) 6. Subordinated loan stock (eg. PIK) ^the above are creditors 7. preference shareholders (nominal value only except participating shares) 8. ordinary shareholders ^the above are owners
69
What is the order in which bondholders get paid in event of liquidation?
1. Fixed charge holders 2. Floating charge holders 3. Unsecured creditors 4. Subordinated loan stock 5.. Mezzanine debt
70
What sits on the line between subordinate loan stock and pref. shareholders?
Mezzanine debt - lowest form of debt
71
What is a straight or plain vanilla eurobond?
fixed coupon eurobonds or bullet bonds that normally pay the coupons once a year
72
What is a ZCB (eurobond variant)?
Zero coupon bond - no coupon Issued at a discount and redeemed at par value
73
What is a floating rate eurobond?
Eurobonds where the coupon rate varies The rate is adjusted in line with published market interest rates The published interest rates that are normally used are a reference rate e.g. SONIA
74
What is a Stepped bond?
A variant of eurobond where the coupon increases over the life of the bond
75
What is speculative grade/bonds in default for Standard and Poor's and Fitch?
- Starts at BB + (each grade (exceot AAA) divided into two, plus and minus) - D
76
What is speculative grade/bonds in default for Moody's?
- Starts at Ba 1 (each grade (Except Aaa) subdivided into three - 1, 2, 3) - C
77
What happens when credit worthiness changes?
Credit rating goes down: Price goes down, yield goes up Credit rating goes up: Price goes up, yield goes down NOTE: Coupon is never affected (only the yield/return)
78
What kind of relationship do prices and yields have?
Inverse
79
What are the pros and cons of debt for companies?
Pros: - another way to raise capital - no sacrifice of control - known obligations (fixed coupon, nom value, redemption date etc) - paid from pre-tax profit (interest charge comes out before tax on IS) - cheaper to finance Cons: - obligation to pay regardless of performance - redemptions (have to pay back) - default can lead to significant repercussions
80
What are the pros and cons of debt for investors?
Pros: - known payments - priority in payment - some debt is default risk-free Cons: - historically lower return - not all debt is default risk free
81
What are the credit rating agencies for Japan and Africa?
* Japan Credit Rating Agency * Global Credit Rating (for Africa)

Unit 2: Securities (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions