bond market

Question 1

bond is an instrument of

Answer 1

debt

Question 2

debt is an instrument of

Answer 2

an obligation

Question 3

types of assets

Answer 3

1,financial (non physical like stocks and bonds)

2,real (physical like stores real estet etc.)

Question 4

bond sectors

Answer 4

1 treasury
2 agency
3 municipal
4 corporate
5 asset-backed securities
6 mortages

Question 5

types of treasuries

Answer 5

1 bill (maturity of  1yr.) 
2 note (10yrs.)
3 bond (10yrs.+)

Question 6

agency

Answer 6

bonds for gov. agencies(cia.fbi etc.)

Question 7

municipal

Answer 7

bonds for local gov. (like local schools,local states like ohio etc.)

Question 8

corporate

Answer 8

1 bonds
2 medium-term notes
3 commercial paper
4 structured notes

Question 9

what does default mean?

Answer 9

Default is the failure to repay a debt. A default can occur when a borrower is unable to make timely payments, misses,avoids or stops making payments.

Question 10

investment grade

Answer 10

relatively low risk of default

Question 11

non investment grade(junk bonds)

Answer 11

high risk of default

Question 12

asset-backed securities

Answer 12

securitization of assets

Question 13

securitization

Answer 13

Securitization involves taking an illiquid asset or group of assets and transforming them into one security. They doing it in most cases of debt

Question 14

prime borrower

Answer 14

low risk borrower(low probability of default)

Question 15

subprime borrower

Answer 15

high risk borrower (high probability of default)

Question 16

coupon payment

Answer 16

annual interest payment that the bondholder receives from the bond’s issue date until it matures

Question 17

liquidity

Answer 17

refers to how easily assets can be converted into cash

Question 18

face value

Answer 18

the face value is the original cost of the

Question 19

inverse floater

Answer 19

a bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate

Question 20

how do investors make money with zero coupon bonds?

Answer 20

by buying them for less than their face value and collecting their principal and interest payments together at maturity.

Question 21

reference rate

Answer 21

interest rate benchmark used to set other interest rates

Question 22

libor

Answer 22

(London Inter-bank Offered Rate)benchmark interest rate at which major global banks lend to one another

Question 23

what does coupon rate=6%-libor mean?

Answer 23

if libor is 1% coupon rate will be 5%, if libor 2% coupon rate will be 4% and so on

Question 24

what is LBO?

Answer 24

Leverage Buy Out is is a type of acquisition whereby the cost of buying a company is financed primarily with borrowed funds

Question 25

deferred coupon bond

Answer 25

A bond whereby the issuer is allowed to defer coupon interest for a specified period of time. usually pays with bond not with actual cash

Question 26

embedded option

Answer 26

is a component of a security that gives either the issuer or the holder the right to take some specified action at present or in the future

Question 27

convertible bond

Answer 27

hybrid instrument of debt and equity(for example a bond holder can convert the bond into a fixed number of stocks)

Question 28

conversion ratio

Answer 28

the number of shares that you can get for 1 bond(if you decide to convert it)

Question 29

exchangeable bond

Answer 29

the bond can be changed into a fixed number of shares of another company

Question 30

CUSIP number

Answer 30

is a unique identification number assigned to stocks and registered bonds.It comprises nine letters and includes letters and numbers

Question 31

immunization

Answer 31

is a strategy that ensures that a change in interest rates will not affect the value of a portfolio

Question 32

credit rating

Answer 32

a measurement of a person or business entity's ability to repay a financial obligation based on income and past repayment histories.

Question 33

credit risk

Answer 33

the risk that a lender will not get paid all principal and interest on time as scheduled on a loan or other borrower obligation

Question 34

credit sread

Answer 34

is the difference between the quoted rates of return on two different investments, usually of different credit qualities but similar maturities.

Question 35

inflation risk

Answer 35

the risk that inflation reduces the value of an investment. Bonds are particularly susceptible to purchasing power risk(If prices of everything from milk to cars to real estate rise, the fixed amount of interest now has less purchasing power)

Question 36

e.r (exchange rate) risk

Answer 36

is an unavoidable risk of foreign investment

Question 37

premium

Answer 37

compensation for risk

Question 38

fisher equation

Answer 38

iₙ=iᵣ+INFL iₙ= nominal interest rate iᵣ=real interest rate INFL=inflation premium

Question 39

downgrade risk

Answer 39

result when rating agencies lower their rating on a bond—for example, a change by Standard & Poor's from a B to a CCC rating

Question 40

secondary market

Answer 40

when investors buy and sell bonds from other investors

Question 41

flight-to-quality

Answer 41

a financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments

Question 42

credit default swap

Answer 42

a financial derivative or contract that allows an investor to "swap" or offset his or her credit risk with that of another investor

Question 43

tvm

Answer 43

time value of money

Question 44

pv

Answer 44

present value=intrinsic value

Question 45

discounting

Answer 45

process of converting future value to present values

Question 46

ordinary annuity

Answer 46

a series of equal payments made at the end of consecutive periods over a fixed length of time

Question 47

rrr

Answer 47

required rate of return the minimum amount of profit (return) an investor will seek or receive for assuming the risk of investing in a stock or another type of security

Question 48

wacc

Answer 48

the discount rate that should be used for cash flows with a risk that is similar to that of the overall firm

Question 49

fcf

Answer 49

Free cash flow is the cash flow available for the company to repay creditors or pay dividends and interest to investors

Question 50

convexity

Answer 50

a measure of the curvature in the relationship between bond prices and bond yields

Question 51

floater

Answer 51

A floater is a debt instrument whose interest rate is tied to a benchmark index such as LIBOR, which is known as its reference rate. A floater protects investors from rising interest rates because it allows them to reap the higher yields when the coupon rate is adjusted higher

Question 52

Vᵢբ= (for example 7%=4%+3% 8%=5%+3%)

Answer 52

Vբᵢᵣ - Vբₗ Vᵢբ=inverse floater Vբᵢᵣ=fixed interest rate Vբₗ=floater

Question 53

collateral

Answer 53

refers to an asset that a lender accepts as security for a loan,it acts as a form of protection for the lender.

Question 54

accrued interest

Answer 54

the amount of interest that has been incurred, as of a specific date, on a loan or other financial obligation but has not yet been paid out.

Question 55

dirty price

Answer 55

refers to the cost of a bond that includes accrued interest based on the coupon rate

Question 56

clean price

Answer 56

refers to the cost of a bond that not includes accrued interest based on the coupon rate

Question 57

present value formula

Answer 57

PV=FV/(1+i)n PV=present value FV= future value r= rate of return n= number of periods

Question 58

yield to call

Answer 58

a financial term that refers to the return a bondholder receives if the bond is held until the call date, which occurs sometime before it reaches maturity.

Question 59

yield to put

Answer 59

the effective annual rate of return a bond earns assuming it is held until the bond's put date, not maturity, and is put (sold) to the issuer at a specific price (put price).

Question 60

yield to worst

Answer 60

is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting

Question 61

yield spread

Answer 61

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level.

Question 62

counterparty risk

Answer 62

is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation.

Question 63

sensitivity analysis

Answer 63

the study of how the uncertainty in the output of a mathematical model or system (numerical or otherwise) can be divided and allocated to different sources of uncertainty in its inputs.

Question 64

1 if coupon increases 2 if term increases 3 if ytm increases

Answer 64

1 volatility decreases 2 volatility increases 3 volatility decreases

Question 65

REPO

Answer 65

repurchase agreement is a form of short-term borrowing, mainly in government securities.

Question 66

sinking fund

Answer 66

is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense, or repayment of a long-term debt

Question 67

collateral trust bond

Answer 67

is a bond that is secured by one or more financial assets