Fixed Income Flashcards
(199 cards)
1
Q
What is tenor?
A
Time period until maturity
2
Q
What is perpetual bond?
A
Bond with no maturity
3
Q
What is floating-rate notes (FRNs)?
A
Its coupon is based on the variable market rate of interest
4
Q
What is market reference rate (MRR)?
A
It is variable market rate of interest
5
Q
What are contingent provisions?
A
Fixed income securities that may have embedded options
6
Q
What is yield of a bond?
A
It is expected return of a bond
7
Q
What is relationship between bond yield and price?
A
Inverse
8
Q
How does bond yield curve looks?
A
It is upward sloping, the higher the maturity, the higher the yield
9
Q
What is used as benchmark for credit spreads?
A
Government bonds
10
Q
How sovereign bonds are repaid?
A
From current/future taxes
11
Q
What is secured bond?
A
It is repaid from operating cashflows with collateral if it defaults
12
Q
What is unsecured bond?
A
It is repaid from operating cash flows only
13
Q
What is affirmative covenant?
A
It is specific requirement the issuer must fulfill
14
Q
What is cross default covenent?
A
If issuer defaults on any other debt, then it is considered to default on this one as well
15
Q
What is pari passu?
A
Bond will have the same priority as any other senior debt
16
Q
What are negative covenants?
A
They are restrictions put on the issuer
17
Q
What is negative pledge cause?
A
Issuer cannot issue more senior debt than existing one
18
Q
What is amortizing loan?
A
Periodic payments include interest and some repayment of principle
19
Q
What is fully amortized?
A
Payment is fully paid off with the last payment
20
Q
What is partially amortized/ballon payment bond?
A
Some remaining part of principle is repaid at the maturity
21
Q
What is sinking fund provisions?
A
It is repayment of principle thorugh series of payment over the lifetime e.g. some random payment of X at year Y
22
Q
What is waterfall structure?
A
It is used to establish principle payments for AB and MBs, where junior tranches does not receive principle repayments until senior tranches are paid
23
Q
What is step-up bond?
A
Coupon rate increases overtime based on the schedule
24
Q
What is credit-linked bond?
A
Its coupon increases if credit rating detoriates
25
What is payment in kind bond?
It allows issuers to make the coupon payments by increasing principle amount of the other outstanding bonds
26
What are green bonds?
Its payments increases if certain environmental goals are not met by the issuer
27
What are index-linked bonds?
Its principle or coupon is based on the published index
28
What are inflation linked bonds?
Its coupon rate is adjusted, but principle remains
29
What is capital-index bonds?
Coupon rate remains, but principle amount is adjusted
30
What are deffered coupon bonds?
Regular coupon payments do not begin until specified time after issuance
31
What is contingence provision?
It is specified action that needs to be taken in event actually occurs
32
What is call protection?
It is time period for which bond in not callable
33
What is call risk?
It is uncertainty about the redemption date
34
What is contingent convertible bond?
Its bonds that convert from debt to common equity automatically if specific event occurs
35
What is domestic bond?
Bond issued in the same market in which bonds are issued and traded
36
What is foreign bond?
Its bonds on issuers from countries other than the market in which bond trades
37
What are Eurobonds?
Bonds issued outside the jurisdiction of any one country and can be issued in any currency
38
What are global bonds?
Bonds that trade in at least on of the domestic market as well as in the Eurobonds market
39
What are international bonds?
Bonds that involve more than one market
40
What is income paid to bondholders treated?
As ordinary income
41
What are Sukuk bonds?
Sharia-compliant bonds with specific restrictions on the payment of interest and use of proceeds to comply with islamic law
42
If you sell coupon before maturity, how it is treated?
It is considered as capital loss/gain and is taxed at lower rate than the ordinary income
43
What are main differences between bond and equity indexes?
Many different bonds are used, they have frequent turnover, sovereign bonds makes significant part
44
What is debut issuer?
It is issuer that is offering first ever bond
45
What is underwritting offering?
It is price of the bond guaranteed by the financial intermediary
46
What is best-efforts offering?
It is when price is not guaranteed, but the intermediary tries its best to sell at best conditions
47
What is shelf registration?
It is when bond issue is registered with regulators in tis aggregates value with master prospectus
48
What is distressed debt?
It is bonds of issuers that are expected to file for bankcrupty
49
What are on the run bonds?
The most recent issue of the bonds
50
What are seasoned bonds?
Older bonds of the issuer/on the market
51
What is commercial paper?
It is ST unsecured debt security issued by large corporations with high credit ratings
52
What is bridge financing?
It is temporary debt until permanent financing can be secured
53
What is rollover risk?
It is risk that re-issued CP will not be sold
54
What are checking accounts?
It offers transaction services and immediate avaiability of funds, but pays no interest
55
What are operational deposits?
it is depostis made by larger customers who require cash management, custody and clearing services
56
What are saving deposits?
They have stated term and interest rate
57
What is certificate of deposit?
It pays interest at specified maturity <1y, might be nonnegotiable meaning that it cannot be sold before maturity and ealy withdrawals may face a penalty
58
What are interbank funds?
It is when banks lend to each other for periods of one day to one year.
59
What is repurchase agreement (repo)?
It is arrangement by which one party sells a security to a coutnerparty with a commitment to buy it back at the later date and higher price
60
Formula of repo purchase price
market value of security/initial margin
61
Formula of repo repurchase price
purchase price*(1+repo rate)
62
What is haircut?
It is discount applied to market value of collateral to get purchase price
63
Formula of haircut
(market value-purchase price)/market value
or
1-1/initial margin
64
What is variation margin?
It is when more collateral is asked if market value of collateral fall below this value and initial margin
65
Formula of variation margin
(initial margin*adjusted purchase price)-market value of collateral
66
What are overnight and term repos?
Overnight - one night, term - longer
67
What is master repurchase agreement?
It is details of the contractual terms of the repo
68
When repo rate is higher? (3)
IR for alternative ST funding is higher, longer repo term, repo is undercollateralized
69
When repo rate is lower? (2)
It has higher credit quality of collateral, collateral is in high demand or low supply
70
What is bilateral repo?
Agreement between two parties
71
What is tri-party repo?
It employs third party intermediary as an agent
72
In what currency debt is denominated in developed markets?
Reserve currency
73
In what currency debt is denominated in emerging markets?
Domestic or external
74
What is domestic debt?
Debt denominated in the issued entities home country currency and is held by the domestic investors
75
What is external debt?
It may be denominated in home currency or gireghn reserve currency
76
What are general obligation bonds?
It is debt raised for general public spending backed by local tax raising power
77
What are revenue bonds?
It is bonds issued for a specific project where funds for repayment comes from fees
78
What are supranational bonds?
These are bonds issued by international institutions
79
Where sovereign bonds are traded when first issued?
In the public autions
80
What are competitive bids?
These are used to set the price of the debt issue
81
What are noncompetitive bids?
They have guaranteed allocation based on the price determined by the competitive bids
82
What is cut-off bid?
It is last succesful bid with lowest price
83
What is YTM?
It is discount rate used for bonds
84
Formula of accrued interest
Coupon payment*(days from last coupon to settlement/days in the coupon period)
85
What is full price of the bonds?
It is sum of flat price and accrued interest
86
Formula of full price
PV on last coupon date*(1+(YTM/periods per n)^days since last coupon/days in coupon period
87
What bonds are more sensitive to a change in yield?
Lower coupon rate and higher maturity
88
What is matrix pricing?
It is method of estimating YTM of bonds that are not currently traded or infrequently traded
89
Formula of an annual yield
(1+YTM/n)^n-1
90
What is street convention?
It is when coupon dates fall on weekends or holidays so coupon payments will actually be made the next business day
91
How true yield is calculated?
Using real coupon payment dates
92
What is current yield?
It looks at only annual interest income
93
Formula of current yield
annual cash coupon payment/bond price
94
What is simple yield?
It takes discount or premium into account by assuming that any discount or premium declines evenly over the remaining years
95
What is yield to worst?
It is lowest YTM of various yields
96
Formula of callable bond value
staight value of bond-call option value
97
What is option adjusted yield?
It is yield that bond would be offering if it didnt have the embedded option
98
What is yield spread?
It is difference between the yield of a bond with its benchmark
99
What is G-spread?
It is yield spread on government bond
100
What is interplatted/I spread?
It is yield spread relative to swap rates that represent extra return of a bond in excess of the interbank MRR used in swap contracts
101
What are spot rates?
These are yields earned by individual cash flows at different maturities
102
What is option adjusted spread?
It is when option effect is taken out
103
What is formula for option value?
Z-spread-OAS
104
What is Z-spread?
It is amount which added to the spot rates will produce value equal to the bond price
105
How values of FRN and fixed-rate debt compare?
Values of FRN are more stable as coupon is reset periodically
106
Formula of coupon rate FRN
risk-free rate MRR+fixed margin (also called quoted margin)
107
What are add-on yield?
Yield when investor plans to reinvest coupon payments at different rates from YTM
108
What is discount yields?
It is annualied current discounts from the face value of money market securities received at maturity
109
Formula of quoted add-on yield
HPY*365/days to maturity
110
Formula of quoted discount yield
actual discount*360/days to maturity
111
What is bond equivalent yield?
It is add-on yield quoted on a 365-days basis
112
What are par yields?
It is coupon rate that bond at each maturity would need to have to be priced at par
113
What is forward rate?
It is borrowing/lending rate for a loan to be made in the future
114
Formula structure for forward rate structure
(1+S)^3=(1+S)^2*(1+2y1y)
115
What are sources of capital from fixed rate bond? (3)
Coupon and principle payments, interest earned on coupon payments that are reinvested over the investors holding period, capital gain or losses
116
What is horizon yield?
It is compound annual return earned from bond over the horizon period
117
Formula of rate of return of a bond
(principle+FV of coupon payment)/(price of the bonds)^1/n-1
118
What is carrying value of a bond?
It is value of a bond at certain time after purchase, assuming the original yield of the bond has not changed
119
What are parameters of short investment horizon?
price risk>reinvestment risk, increase in yield, decrease in rate of return
120
What are paramenters of long investment horizon?
reinvestment risk>price risk, increase in yield, increase in rate of return
121
What is Macaulay duration?
It is average time until the receipt of the each cash flows of the bond
122
What is duration gap?
It is difference between bond's Macaulay duration and your investment horizon
123
What is Modified duration?
It is sensitivity of price given change in YTM
124
Formula of Modified duration
MacDur/(1+YTM)
125
Formula of change in price with ModDur
-ModDur*change in YTM
126
Formula of approximate ModDur
V(-)-V(+)/2*V0*change in YTM
127
What is Money duration?
It is ModDur in money terms
128
Formula of money duration
annual ModDur*full price of bond position
129
What is price value of a basis point?
It is money change in the full price of a bond when its YTM changes by one basis point or 0.01%
130
Formula of PVBP
V(-)-V(+)/2
131
What is relationship with maturity and MacDur?
Direct relationship
132
What happens to Macaulay Duration when YTM remains constant between coupon dates?
It decreases smoothly and then slightly goes back up at each coupon payment date
133
What is relationship between coupon rate and interest rate risk?
Inverse
134
Which will have higher duration - zero or coupon bond?
Zero bond
135
What is relationship between YTM and interest rate risk?
Inverse
136
Formula of convexity of cash flow at period t
t(t+1)/(1+r)^2
137
How to annualize convexity of CF?
Divide by the number of period per year squared
138
Formula of approximate convexity
(V(-)+V(+)-2V0)/(changeYTM^2*V0)
139
What fctors of maturity, coupon rate and YTM increases convexity?
Longer maturity, lower coupon rate, lower YTM
140
Formula of change in bond's price with ModDur and convexity
-annual ModDur*(change in YTM)+0.5*annual convexity*(change in YTM)^2
141
Formula of money convexity
annual convexity*full price of bond position
142
Formula of portfolio duration
weighted average of each security
143
What is limitation of portfolio duration approach?
It assumes that YTM of everybond in the portfolio changes by the same amount
144
What is effective duration?
It is duration of a bond with embedded options, shows price change given change in the IR
145
Formula of effective duration
V(-)-(V+)/(2*V0*change in curve)
146
Formula of effective convexity
((V-)+V(+)-2V0)/(change in curve)^2*V0
147
What is convexity of a callable bond?
It can show negative convexity at low yields
148
How duration of aembedded bond compares to option-free bond?
It is always less
149
What is convexity of a putable bond?
Always positive
150
Formula of effective price change
-EffDur*change in curve+1/2*EffCon*(change curve)^2
151
What is key rate duration?
It is sensitivity of the value of the bond ot portfolio to changes in the benchmark yield for specific maturity, holding other yields constant
152
What is shaping risk?
It is effect of a non parallel shift in the yield curve on bond portfolio
153
What are empirical durations?
It is use of actual observed historical relationship between benchmark yield changes and bond price changes
154
What is credit risk of a bond?
It is risk associated with losses to fixed income investors streaming from failure to make payments
155
What are components of bottom-up analysis of credit risk? (5)
Capacity, capital, collateral, covenants and character
156
What are components of top down analysis of credit risk? (3)
Conditions, country, currency
157
What does it mean of being illiquid?
Inability to raise cash to service debt
158
What does it mean to be insolvent?
It is when assets of an issuer fall below value of its debt
159
Formula of expected loss
probability of default*loss given default
160
What is recovery rate?
It is proportion of claim investor will recover if issuer defaults
161
Formula of loss severity
1-recovery rate
162
What is expected exposure?
It is difference between amount investor is owed and value of collateral
163
Formula of loss given default in %
expected exposure*(1-recovery rate)
164
Formula of LDG credit spread
probability of default*LDG%
165
What are risks of relying on credit agencies? (3)
Credit rating lag market pricing, some risks are difficult to assess, mistakes of credit agencies
166
What is credit spread risk?
It is risk that yield spread widen due to detoriating conditions, causing credit-risky bonds prices to decrease
167
What are incentives of exposure to high credit risk? (3)
Diversification, capital appreciation, equity-like returns
168
What is market liquidity risk?
Transaction costs of trading a bond
169
How market liquidity risk is examined?
Based on bid-offer spread
170
How to calculate credit risk?
Difference of yields usng bid-offer sprad is liquidity risk and remaining part ir credit risk
171
What is corporate family ratings (CFR)?
It is rating based on senior unsecured debt
172
What is corporate credit rating (CCRs)?
It is rating of a specific issue
173
What is notching?
Assigment of individual issue rating that differ from the issuer rating
174
What is process of securization?
Pool of debt-based assets is created, this pool is sold to SPE, SPE issues fixed-income securities supported by the cash flows from the collateral
175
What does it mean to be bankcruptcy remote?
Buyers of ABS are not affected by the financial position of the seller/servicer and does not have claims on other assets
176
What is purchase agreement?
Terms of the purchase of the collateral by SPE
177
What are covered bonds?
They are senior debt obligations of financial institutions that are similar to ABS, but underlying assets are not removed from the balance sheet as no SPV is created
178
What is hard-bullet covered bond?
If issuer fails to make payments on time, amount due is accelerated to covered bondholders
179
What is soft-bullet covered bonds?
Failed payments can postpone maturity up to 1 year
180
What are conditional pass-through covered bonds?
It convers to pass-through bond on the maturity date if any payments remains due, meaning that any payments recovered are passed to investors
181
What is overcollateralization?
It is when value of collateral exceeds face value of the ABS
182
What is excess spread feature?
Reserve building in the ABS structure by earning higher income on the collateral than the coupon promised to ABS investors
183
What is credit tranching?
It is ABS structure with multiple classes of securities, each with different claim to CF of the collateral
184
What is equity tranche?
The most junior one that gets pay last
185
What is lockout period?
It is period when only fees and interest payments are made
186
What are types of collateralied loan obligations? (3)
Cash flow, market value and synthetic
187
What are cash flow CLO?
cash flows to investors are generated through cash flows on the underlying collateral
188
What is market value CLOs?
cash flows are generated through trading market value of underlyign collateral
189
What is synthetic CLOs?
Collateral pool exposure is generated through credit derivative contracts
190
What is prepayment risk?
It is risk that principle payments by mortgage borrowers in excess of the schedule principle repayments for amortizing loans
191
Why prepayments are bad for MBS?
They are repaid in low-interest environment and face lower reinvestment return, prices will not rise as much as other fixed income instruments
192
What is residential mortgage loan?
It is loan where underlying asset is residential real estate
193
What are agency RMBS?
They are guaranteed by the governments or government sponsored enterprise
194
What are non-agency RMBS?
They are issued by private entities and have no government or GSE guarantee
195
What are mortgage pass through security?
It is claim on the cash flows from a pool of mortgages, net of administration fees
196
What is Z-tranche?
It is tranche which receives no interest payment during a specified accrual period, but interest is added to principle
197
What are planned amortization class tranches?
It is predictable payments as long prepayment speeds remain within a certain range
198
What is defeasense?
It is when borrower uses payments in excess of scheduled loan payments to purchase a portfolio of government securities that is sufficient to make the remaining scheduled principle and interest payments of the loan
199
