Fixed-Income Securities Defining Elements Part 5

Question 1

Contingency provision

Answer 1

A clause in a legal document that allows for some action if the event or circumstance does occur
embedded option

Question 2

Callable Bond

Answer 2

Give the right to redeem all or part of the bond before the specified maturity date
Face reinvestment risk
Higher yield, sell lower

Question 3

Why issue callable bonds

Answer 3

To protect the issuer when market interest rates drop
the credit quality of the issuer improves
Companies issue them to signal the market about their credit quality

Question 4

Details of callable Bond

Answer 4

Call price
call Premium
call schedule
call protection period
Call date

Question 5

Call price

Answer 5

Price paid by the issuer to the bondholder when the bond is called

Question 6

Call Premium

Answer 6

The amount paid on top of the face value as compensation to bondholders as they will have to reinvest proceeds at a lower rate

Question 7

Call schedule

Answer 7

The dates and prices at which the bond may be called

Question 8

Call protection period

Answer 8

The lockout period, deferrment, or cushion period
the early days of a bond’s life to encourage investors to invest in the issue

Question 9

Call date

Answer 9

The earliest date at which the bond may be called

Question 10

Types of callable bonds

Answer 10

American call
European call
Bermuda-style call

Question 11

American call

Answer 11

The issuer has the right to call the bond ANY TIME after the first call date

Question 12

European call

Answer 12

The issuer has the right to call the bond ONLY ONCE after the call date

Question 13

Bermuda style call

Answer 13

The issuer has the right to call the bond on specific dates after the call protection period

Question 14

Putable Bond

Answer 14

Gives the bondholder the right to sell the bond back to the issuer at a predetermined price on specific days
Lower yield, sell higher

Question 15

Benefits of putable Bond

Answer 15

When interest rates rise, bond prices fall
cash can be reinvested at higher rates

Question 16

Details of putable Bond

Answer 16

Redemption date
selling price
how many times the issue allows bondholders to sell the Bond
One-time Put
multiple Put

Question 17

One-time put

Answer 17

Gives bondholders a single sellback opportunity

Question 18

Multiple put

Answer 18

More than one sellback opportunity is available
priced higher than one-time put bonds

Question 19

Types of putable bonds

Answer 19

American put
European put
Bermuda-style put

Question 20

American put

Answer 20

Bondholder has the right to sell the bond back to the issuer ANY TIME after the first put date

Question 21

European put

Answer 21

Bondholder has the right to sell the bond back to the issuer ONLY ONCE at the put date

Question 22

Bermuda-style put

Answer 22

Bondholder has the right to sell the bond back to the issuer only on specified dates

Question 23

Convertible Bond

Answer 23

A hybrid security with both debt and equity features

Question 24

Advantages of convertible bonds for investor

Answer 24

Opportunity to convert into equity if share prices are increasing (upside)
Downside protection if share prices are falling

Question 25

Advantages of convertible bonds for issuer

Answer 25

Reduced interest expense lower yield because of the conversion provision given to bondholders
elimination of debt if conversion option is exercised
usually callable

Question 26

Conversion price

Answer 26

Price per share at which the convertible bond can be converted into shares

Question 27

Warrant

Answer 27

An attached option not an embedded option

Question 28

Contingent convertible bonds

Answer 28

Bonds with contingent write-down provisions
can be converted into equity contingent to a specified condition