Fixed Income I Flashcards Preview

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Flashcards in Fixed Income I Deck (33):
1

Types of debt (2)

(1) Preferred stock and (2) debt

2

Affirmative covenants

What the borrower promises to do:
(1) pay interest and principal
(2) pay taxes when due
(3) maintain property, etc

3

Negative covenants

Limitations on borrower's activity (e.g. no new debt)

4

Maturity (short, medium, long)

Short: 1 - 5 years
Medium: 5 - 12
Long: >12

5

Step-up notes

Coupon rate increases over time

6

Deferred coupon bonds

Interest deferred originally, then paid later. Rates are typically higher.

7

Dirty price

Price + interest

8

Default (accrued interest)

When in default sold without accrued interest

9

Bullet

Only interest is paid until maturity, maturity all principal is returned.

10

Call provision

Gives bond issuer right to retire debt before maturity

11

Nonrefundable

Can be called by issuer, but not replaced by new debt at a lower yield.

12

Sinking fund provision

Company retires a certain amount of debt each year.
(1) lowers credit risk, less debt outstanding,
(2) bad if your debt gets called though

13

Conversion privilege

Allows bond holder to convert to specified number of shares

14

Put provision

Allows bond holder to put back to issuer at a specified price on designated dates

15

Embedded options for issuer (4)

(1) right to call
(2) right to prepay principal
(3) Accelerated sinking fund
(4) Cap on a floater

16

Embedded options for bond holder (3)

(1) conversion privilege
(2) Right to put the issue
(3) cap on a floater

17

Repurchase agreement

Sell bond with agreement to later repurchase same securities back at a specified date and price. Repo rate based on difference between sell and buy price.

18

Duration formula

(price if yield declines - price if yield rises) / (2 * initial price * change in yield)

19

Duration assumption

Parallel shift in yield curve

20

Reinvestment risk

Yield quoted on bond assumes reinvestment at same rate, may not be possible.

21

Callable bond price formula

Price of callable bond = price of option free bond - price of embedded cal

22

Yankee bonds

Issued by non-US companies and traded in the U.S.

23

Supranatural

Entity formed by two or more central governments through international treaties

24

Single price bid auction

Securities are awarded at the highest bid that clears the whole inventory.

25

Multi price bid auction

Individuals receive the price of the bid that they put forth.

26

TIPS

Coupon and principal adjusted by inflation amount

27

Government sponsored enterprises

Privately owned and publicly chartered entities created by Congress:
(1) Farmer Mac
(2) Freddie Mac
(3) Sallie Mae
(4) Fannie Mae

28

MBS

Mortgage Passthrough Securities
(1) Bundle of mortgages
(2) Spreads prepayment risk across number of issues
(3) Pays each member equally

29

CMOs

Collateralized Mortgage Obligations
(1) Different tranches with different risk/priority

30

Redeemed

Called through call option or sinking fund

31

Refunded

Lower yield debt issued to call older debt

32

Accelerated sinking fund

Required to retire $10m, but retiring more

33

Benefits of REPOs

(1) repo rate is usually less than margin (asset-backed)
(2) Not regulated by the Federal Reserve, like margin
(3) Better terms for the lender - technically own security so easier if bankruptcy