Chapter 8: Short-term bonds and notes

Question 1

Fixed income securities

Answer 1

An asset class of securities offering investors defined cash flows and a specific time line for return of the principal amount invested.

Question 2

Listed securitues

Answer 2

1. Listed on an exchange
2. Can be traded OTC
3. Registered by a custodian

Question 3

Non-listed securities

Answer 3

1. Only OTC
2. CP, CD, T-bill: registered by custodian
3. Debenture: private placement

Question 4

Primary market

Answer 4

Issue of a security

Question 5

Auction

Answer 5

1. Issuing of government bonds (=tender)

2. Limited amount of banks can join the auction (=primary dealers)

Question 6

Gilt Edged Market Makers (GEMM)

Answer 6

Primary dealers for UK government bonds

Question 7

Tap issue (seasoned issue)

Answer 7

Re-issuing of a governemnt bond

Question 8

Secondary market (tradable, marketable, negotiable)

Answer 8

If during the term a fixed income security is traded

Question 9

Domestic bond

Answer 9

Bonds issued in a domestic market and a local currency

Question 10

Eurobonds

Answer 10

Bonds that er issues in a currency different from the country of issue. GPB denominated bond issued in the US by US company

Question 11

Foreign bonds

Answer 11

Bonds that are issues by non-residents in the domestic market of the local currency. USD bond issues in US by Japanese company

Question 12

Yield of a coupon

Answer 12

1. The expected return on the bond if held to maturity and assuming they can be re-invested
2. Gov. bond + spread
3. IRS + swap

Question 13

Dirty value

Answer 13

1. Listed bonds: Clean price (as shown on platforms + accrued interest untill settlement date)
2. Present value of all future cash flows (coupons and amortization)

Question 14

Par bond

Answer 14

Clean price is equal to current yield for the remaining term

Question 15

Premium bond

Answer 15

Clean price is higher than the current yield for the remaining term

Question 16

Discount bond

Answer 16

Clean price is lower than the current yield for the remaining term

Question 17

Covered bond

Answer 17

1. Debt instrument secured by a cover pool of mortgage loans
2. Public-sector debt to which investors have a preferential claim in the event of default

Question 18

Asset backed securities (ABS)

Answer 18

1. Security whose income payments and are derived from and collateralized by a specifid pool of underlying assets
2. Investors do not have a claim in case of default

Question 19

Subordinated loan (junior loan)

Answer 19

Loans in which interest payments and repayments are subordinated to other fixed income securities
2. In case of default issuer must settle other loans before junior loans

Question 20

Senior loan

Answer 20

Loan that takes priority over all other loans

Question 21

Callable/putable bonds

Answer 21

1. Bonds that can be redeemed or sold prematurely by the issuer
2. Price is at or above 100

Question 22

Convertible bonds

Answer 22

Bonds that can be exchanged by the holder for a pre-determined numer of shares

• Combination of bond an a call-option on issuer’s shares
• Multiple risks: credit, interest rate and equity risk

Question 23

Bullet bonds

Answer 23

Bonds that amortize at once at the maturity date

Question 24

Sinking funds

Answer 24

Bonds that amortize following pre-agreed schedule

Question 25

Perpetuals

Answer 25

Bonds that do not redeem

Question 26

Zero-coupon bond

Answer 26

1. Bond that does not pay coupons during its term

2. Price is usually lower that the face value

Question 27

Floating rate notes (FRN)

Answer 27

• bond with an interest coupon that is reset periodically (3 or 6 months)
• Based on current money market yield

Question 28

Minimax/collared

Answer 28

FRNs that can only fluctuate within a certain range

Question 29

Index-linked bond

Answer 29

bond of which the principal is at par at the time of maturity and coupons are paid anually

Question 30

Junk bonds

Answer 30

bonds issues by companies with low credit ratings

Question 31

T-Bill US (Money market paper)

Answer 31

• Issued by US Treasury

- Term: 4, 12, 26 weekly

Question 32

T-Bill UK (Money market paper)

Answer 32

• Issued by Debt Management Office

- Term: 1, 3, 6, 12 months

Question 33

Bill of exchange (Money market paper)

Answer 33

• Issued by company and are used as a means of payment to their supplier
• Bank bill is issued by a company and backed by a bank
• Usually smaller than 3 months

Question 34

CD: Certificate of deposit (Money market paper)

Answer 34

• Issued by a bank
• UK max term is 5 years
• Issue price: face value
• Final proceeds: face value + interest

Question 35

CP: Commercial paper US (Money market paper)

Answer 35

• Issued by all kinds of market parties
• Max 270 days
• Issue price: discounted amount
• Final proceeds: Face value

Question 36

CP: Commercial paper UK and Euro Area (Money market paper)

Answer 36

• UK Max term of 1 year
• Issue price: present value of amortization
  Final proceeds: Face value

Question 37

Responsibilities of a paying agent

Answer 37

1. Co-decide on the issue price
2. Draw-up a global note and notification with CSD
3. Apply for an ISIN code
4. Supply dealers and investors with prospectus
5. Arranging cash flows related to the issue

Question 38

Responsibilities of a listing agent

Answer 38

Next to all responsibilities of the paying agent

1. Placing a public announcement
2. Reporting to and/or gaining approval for the listing from the supervisor
3. Registering the securities with the clearing institution
4. Publicizing the result of the issue in the media