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CFA Condensed > Fixed Income > Flashcards

Fixed Income Flashcards

1
Q

What are two types of affirmative covenants

A

Pari passu clause
Cross default

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2
Q

What is are the two types of covenants

A

Affirmative
Negative

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3
Q

What does an affirmative covenant do?

A

Specifies requirements the issuer must fill

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4
Q

What does a negative covenant do?

A

Places restrictions on the issuer

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5
Q

what is a sinking fund provision

A

Provides the repayment of principal through a series of payments over the life of the bond

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6
Q

What are contingency provisions in bonds referred to?

A

Embedded options

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7
Q

What is a Capital indexed bond

A

Coupon rate remains constant and the principal value of the bond is increased by the rate of inflation (TIPS)

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8
Q

What is a PIK bond

A

Make coupon payments by increasing the principal amount

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9
Q

Warrant

A

Like a convertible bond by do not require the bonds being retired at exercise

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10
Q

What is a domestic bond

A

Bonds of issuers domiciled in the same country as the market in which they are traded

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11
Q

What is a foreign bond

A

Bonds of issuers from countries other than trading country

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12
Q

What is a Eurobond

A

Issued outside of the jurisdiction of any one country and are domiciled in a currency different from the currency of the countries in which they are sold

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13
Q

Describe the yield on a callable bond

A

Yield is higher as there is call risk

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14
Q

What is shelf registration

A

Portions of the registered issuer can be issued over time when the issuer needs to raise funds - less disclosure

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15
Q

What is a underwritten offering

A

Underwriter purchases the entire bond issue from the issuing firm

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16
Q

What is a best efforts offering?

A

IB sells the bonds on a commission basis

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17
Q

What is a repo

A

One party sells a security to a counterparty with a commitment to buy it back later at a specified higher price

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18
Q

How does a repo borrower protect against the price of collateral going down

A

Must post initial margin

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19
Q

How might you mitigate repo risk

A

Tri party repos - employ a clearinghouse

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20
Q

What is a competitive bid

A

Used to set the price of the debt issue - the lowest accepted price is referred to as the cutoff yield

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21
Q

What is a non-competitive bid

A

Guaranteed to have their allocation met at the price determined by the competitive bids

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22
Q

What price do investors pay at a single price auction?

A

All investors pay the price associated with the cutoff yield

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23
Q

What is an on the run bond

A

Most recently issued government securities - yields are used to represent default risk free bonds

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24
Q

If CPN > YTM what will the price be trading at?

A

Premium to par value

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25
What sort of bond is more sensitive to a change in yield?
The price of bond with a lower coupon rate is more sensitive to a change in yield.
26
How to find the full price of a bond
Calculate the value of the bond on the last cpn date x compound this value at YTM per period divided by days since last cpn payment
27
What is a bonds clean price
Flat price (full price - accrued interest
28
What is OAS?
Spread to the spot rate curve that the bond would have if it were option free For a callable bond the OAS is less than Z spread
29
What does OaS account for
Differences between liquidity and credit quality
30
What is a forward rate?
Yield for future periods such as the rate of interest on a 3yr loan
31
What does a 2yr3yr mean
Rate 2 years from now 3 years = length of the loan
32
How to find the spot rate from forward rates
Like holding period return or geometric mean
33
How to find the forward rate from spot rates?
34
What is Macaulay duration?
Macaulay duration measures the weighted average time it takes to receive the bond’s cash flows (both interest and principal), expressed in years.
35
What is duration gap
Differential between a bonds Macaulay duration and a bond holders investment horizon
36
If Macaulay duration is less than investment horizon what is the duration gap?
Negative duration gap
37
What is effective convexity
Effective convexity measures a bond’s sensitivity to changes in interest rates, taking into account changes in cash flows due to embedded options (like call or put features). Measures the Curvature
38
What is effective duration
Effective duration is a measure of a bond’s price sensitivity to changes in interest rates, specifically when the bond has embedded options (like call or put features).
39
What is the formula for effective duration
40
What is the formula for effective convexity
41
How do I work out the price change including convexity adjustment
42
What is the convexity of any option free bond?
Positive
43
What is key rate duration
Sensitivity of the value of a bond or portfolio to changes in the spot rate for a specific maturity
44
What is analytical duration
Measures bond price sensitivity to changes in yields based on mathematical analysis
45
Formula for expected loss
46
Formula for credit spread
Probability of default x loss given default
47
Formula for loss severity
1 - recovery rate
48
How can we estimate the price impact of a change in credit spread? What formula?
49
What is a general obligation Bond
Unsecured bond backed by the taxing power of the issuing non sovereign government entity
50
What is a revenue bond?
Issued to finance specific projects. Often have more credit risk than GO bonds
51
What is a disinterested trustee
Appointed to oversee the safe keeping of collateral and cash flows due to the ABS investors and provide information to ABS holders
52
What are 3 credit enhancement structures
Over collaterization Excess spread Credit trenching/subordination (water fall)
53
What is a covered bond
Similar to ABS but no SPE is created. The assets remain on the issuers balance sheet
54
If an issuer defaults what can investors do and what do they have?
They have dual recourse and have claims on both the underlying assets and issuers other assets that have not been pledged as collateral for other debt
55
What is a hard bullet covered bond
Is in default if the issuer fails to make a scheduled payment leading to the accelerating of payments to bond holders
56
What is a soft bullet bond
May postpone the originally scheduled maturity date by as much as a year, should a payment on the covered bond be missed
57
What is a conditional pass through covered bond?
Converts to a pass through bone on the maturity date
58
What are the risks with MBS’s
Pre payment risk Extension risk Contraction risk
59
60
What is a mortgage pass through security
Represents a claim on the cash flows from a pool of mortgages
61
What is a z tranche
Receives no interest payments during a specified accrual period but rather accrues extra principal
62
Formula for LTV ratio
63
Debt to service ratio
64
How can loan level call protection be provided?
- prepayment lockout period - defeasance - any pre-payments are used to purchase t bills - pre-payment penalty
65
66
What bonds have the highest return
Callable bonds
67
Regarding changes in prices and yields does the price change more if YTM increases or decreases? Despite the same change in YTM
Increased - absolute change in price increase would be more than the absolute amount of the price decrease for the same absolute change
68
What is flat price?
Agreed bond price excluding accrued interest
69
Exceptions to the maturity effect are what sort of bonds?
Bonds that have long maturities, make small payments and trade at a discount
70
What are bonds quoted in
Flat price and settled using the full price
71
If a bond is trading at a discount what does it generally mean
The coupon rate is lower than YTM
72
What is the G-Spread?
The yield above that of a government bond with the same maturity
73
What relationship is the price yield relationship?
Convex
74
What is constant yield price trajectory?
Change in value as time passes for a discount or premium bond
75
Does flat price include interest accrued?
No
76
what is the flat price formula
Flat price = full prixe - accrued interest
77
What is z spread
Accounts for the shape of the yield curve
78
What are bonds quoted in
Quoted in the clean price/flat price and settled using the full price
79
When might the maturity effect not hold?
When a low coupon long term bond trades at a discount
80
What is the discount margin?
The margin spread required by investors
81
How do you know if a FRN will be priced at a discount?
If the quoted margin is less than the discounted margin
82
How to work out BEY
1) work out the price of the instrument 2) calculate the AOR or its BEY
83
who can call the issue?
The issuer
84
Reinvestment risk of a bond is higher for one selling at?
A premium
85
Logic behind spot curve calculation?
Can be calculated as the geometric average of forward rates

CFA Condensed (10 decks)

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