Fixed Income

Question 1

Spot Rates (sometimes referred to as zero-coupon rates)

Answer 1

Are the annualized market interest rates for a single payment to be received in the future. Generally, we use spot rates for government securities (risk-free) to generate the spot rate curve. Spot rates can be interpreted as the yields on zero-coupon bonds

Question 2

Forward Rate

Answer 2

The annualized interest rate on a loan to be initiated at a future period

Question 3

Spot Yield Curve or Spot Curve

Answer 3

The term structure of spot rates - the graph of the spot rate SvT versus the maturity of T

Question 4

Forward Curve

Answer 4

The term structure of forward rates`

Question 5

Yield to Maturity

Answer 5

is the spot interest rate for a maturity of T. However, for a coupon bond, if the spot rate curve is not flat, the YTM will not be the same as the spot rate.

Question 6

Issuers of Bonds

Answer 6

There are several types of entities that issue bonds when they borrow money, including:
* Corporations - Often corporate bonds are divided into those issued by financial companies and those issued by nonfinancial companies
* Sovereign National Governments - A prime example is US Treasury Bonds, but many countries issue sovereign bonds
* Non-Sovereign Governments - Issued by government entities that are not national governments, such as the state of California, or the city of Salt Lake.
* Quasi-government Entities - Not a direct obligation of a country’s government or central bank. An example is the Federal National Mortgage Association (FANNIE MAE)
* Supranational Entities - Issued by organizations that operate globally such as the World Bank, the European Investment Bank, and the International Monetary Fund (IMF)
* Special Purpose Entities - These are corporations set up to purchase financial assets and issue asset-backed securities, which are bonds backed by the cash flow from those assets

Question 7

Features of Fixed-Income Securities Include Specification of:

Answer 7

• The issuer of the Bond
• The Maturity Date of the Bond
• The Par Value (Principle Value to be Repaid)
• The Coupon Rate and Frequency
• The Currency in which Payments will be Made

Question 8

Term to Maturity or Tenor of a Bond

Answer 8

The maturity date of a bond is the date on which the principle is to be repaid. Once a bond has been issued, the time remaining until maturity is referred to as term to maturity

Question 9

perpetual bonds

Answer 9

Bonds that have no maturity. They make periodic interest payments by do not promise to repay the principal

Question 9

Money Market Securities

Answer 9

Bonds with original maturities of one year or less.

Question 10

Capital Market Securities

Answer 10

Bonds with original maturities of more than one year

Question 10

Par Value of a Bond

Answer 10

is the principal amount that will be repaid at maturity. Par Value is also referred to as the FACE VALUE, MATURITY VALUE, REDEMPTION VALUE, or PRINCIPAL VALUE of a bond.

Question 11

Premium to Par

Answer 11

A bond that is selling for more than its par value is said to be trading at a premium to par

Question 12

Discount to Par

Answer 12

Bond that is selling at less than its par value

Question 13

Trading at Par

Answer 13

A bond that is selling for exactly its par value

Question 13

Coupon rate on a Bond

Answer 13

Is the annual percentage of its par value that will be paid to bondholders