Fixed Income Instrument Features

Question 1

What are “Fixed-Income Instruments”?

Answer 1

Debt instruments such as loans or bonds.

Question 2

What are “Loans”?

Answer 2

Debt instruments agreed to between a borrower and lender, typically a bank.

Question 3

What are “Bonds”?

Answer 3

A contractual agreement between an issuer and bondholders.

Question 4

What are “Fixed-Income Securities”?

Answer 4

Fixed-Income instruments designed to be more easily tradable than a loan (e.g., a bond).

Question 5

What does “Principal” refer to?

Answer 5

The amount that an issuer agrees to repay the debtholders on the maturity date.

Question 6

What is “Par Value”?

Answer 6

The amount of principal on the bond, also known as face value.

Question 7

What is a “coupon”?

Answer 7

Periodic interest payments paid by a bond issuer to investors, typically expressed as a percentage of par on an annual basis.

Question 8

What are “Asset-backed securities” (ABS)?

Answer 8

A type of bond issued by a legal entity called a special purpose entity created solely to own assets such as loans, receivables, and mortgages and to distribute flows to ABS investors.

ABS refers to non-mortgage ABS.

Question 9

What is “maturity”?

Answer 9

The date of a fixed-income instrument’s final payment to investors?

Question 10

What is a “Tenor”?

Answer 10

The remaining time to maturity for a bond or derivative contract. Also called term-to-maturity.

Question 11

What are “Money Market Securities”?

Answer 11

Fixed-income securities with original maturities of one year or less.

Question 12

What are “Capital Market Securities”?

Answer 12

Fixed-income securities with original maturities greater than one year.

Question 13

What is “Face Value”?

Answer 13

The amount of principal on a bond, also known as “par value”.

Question 14

What are “Floating-Rate Notes”?

Answer 14

Notes which interest payments are not fixed but instead vary from period-to-period depending on the current level of a reference interest rate.

Also known as “floaters”.

Question 15

What is a “credit spread”?

Answer 15

The compensation for the risk of default in a debt security, typically measured by the yield-to-maturity difference between a bond and a comparable government benchmark security.

Question 16

What are Zero-Coupon Bonds?

Answer 16

Bonds that do not pay interest during their life.

They are typically issued at a discount to par and then redeemed at par.

Also called “Pure Discount Bond”

Question 17

What is “Seniority”?

Answer 17

Priority of payment of various debt obligations.

Question 18

What is “Senior Debt”?

Answer 18

A debt obligation with higher priority than junior debt obligations.

Question 19

What is “junior debt”?

Answer 19

Debt obligations with lower payment priority than senior debt obligations.

Question 20

What is “subordinated debt”?

Answer 20

A class of unsecured debt that ranks below a firm’s senior unsecured obligations.

Question 21

What is a “Contingency Provision”?

Answer 21

Clause in a legal document that allows for some action if a specific event or circumstance occurs.

Question 22

What are “Embedded Options”?

Answer 22

Contingency provisions found in a bond’s indenture representing rights that enable their holders to take advantage of interest-rate movements.

They can be exercised by the issuer, by the bondholder, or automatically depending on the course of interest rates.

Question 23

What is a “current yield” (CY)?

Answer 23

The sum of the coupon payments received over the year divided by the flat price.

Also called “interest yield” or “running yield”.

Question 24

What is the “Yield Curve”?

Answer 24

a graphical depiction of yields-to-maturity of bonds from the same issuer across maturities.

Question 25

What is an “Indenture”?

Answer 25

a written contract between a lender and the borrower that specifies the terms of the loan, such as interest rate, interest payment schedule, or maturity.

Question 26

What does “Unsecured” mean?

Answer 26

It means “without collateral” and therefore is only backed by the cash flows of the issuer.

Question 27

What is a “Lien”

Answer 27

A legal right or claim to property by a creditor.

Question 28

What is a “Pledge”?

Answer 28

A legal right or claim to property by a creditor.

Also called a “Lien”.

Question 29

What does “Secured” mean?

Answer 29

it means “with collateral”

Debt is therefore backed by both cash flows of the issuer and the collateral as a secondary source of payment.

Question 30

What is “Collateral”?

Answer 30

Assets or financial guarantees underlying a debt obligation that are above and beyond the issuer’s promise to pay.

Question 31

What are “Tranches”?

Answer 31

A group of securities within an issue with characteristics that vary from one another.

For example, different credit quality or seniority.

Question 32

What are “Covenants”?

Answer 32

The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to perform (affirmative covenant) or prohibited from performing (negative covenant).

Question 33

What is a “Pari Passu Clause”?

Answer 33

A covenant or contract clause that ensures a debt obligation is treated the same as the borrower’s other senior debt instruments and is not subordinated to similar obligations.

Question 34

What is a “Cross-Default Clause”?

Answer 34

Covenant or contract clause that specifies borrowers are considered in default if they default on another debt obligation.

Question 35

What is an “Incurrence Test”?

Answer 35

A financial ratio or other measurement taken prior to an action, such as a debt issuance, usually on a pro-forma basis taking the action into account.

The satisfaction of this test is linked to covenants between the issuer and investors.

Question 36

What is a “Negative Pledge Clause”?

Answer 36

Limitations on investments, the disposal of assets, or issuance of debt senior to existing obligations.

Negative covenants seek to ensure that the issuer maintains the ability to make interest and principal payments.