IPT 1 Chapter 14

Question 1

What are fixed-income securities?

Answer 1

A claim on a specified periodic stream of income

Question 2

What are the bond components”?

Answer 2

1, Face value
2. Maturity date
3. Coupon rate
4. Coupon Frequency

Question 3

What are the different types of Treasure securities?

Answer 3

1. Treasure bills: Maturity <1 year
2. Treasure notes: maturity 1-10 year
3. Treasure bonds: maturity of 10-30 years

Question 4

What are different types of corporate bonds?

Answer 4

1. Commercial paper
2. Callable bonds
3. Convertible bonds
4. Puttable bonds
5. Floating-rate bonds
6. Serial bonds

Question 5

What is a commercial paper?

Answer 5

Zero-coupon corporate bond with a very short maturity

Question 6

What is a callable bond?

Answer 6

Allows issuer to repurchase bond at a specified call price before maturity (lower price)

Question 7

What are the advantage to the firm and disadvantage to the lender of a callable bond?

Answer 7

Advantage firm: It can refinance at lower interest rates when market rates fall
Disadvantage lender: Receive money back when interest rates are low and other investment opportunities are unattractive

Question 8

What is a convertible bond?

Answer 8

Gives bondholders the option to exchange each bond for a specified number of shares of common stock of the firm (lower return)

Question 9

What is the conversion ratio?

Answer 9

Number of shares for which each bond may be exchanged

Question 10

What are puttable bonds?

Answer 10

Bondholders have the option to extend the maturity date or demand early repayment of principal (lower yield)

Question 11

What are floating-rate bonds?

Answer 11

The coupon rate is adjusted at pre-specified dates to some benchmark rate

Question 12

What is the advantage of floating-rate bonds?

Answer 12

They protect against interest rate risk

Question 13

What are serial bonds?

Answer 13

Bonds with staggered maturity dates

Question 14

What is the advantage to the holder and disadvantage of the issuer for serial bonds?

Answer 14

Advantage lender: It reduces default risk at maturity dates
Disadvantages issuer: Having to make prepayments

Question 15

What are the recent bond market innovations?

Answer 15

1. Cocos
2. Preferred stock
3. Catastrophe bonds
4. Social impact bonds
5. Securitized bonds

Question 16

What are cocos?

Answer 16

Contingent convertible bonds that automatically convert into equity at predetermined distress trigger events

Question 17

What is preferred stock?

Answer 17

Stock with bond-like features that promises to pay at specified stream of dividends, has credit ratings and can be called, but missed payment does not trigger default

Question 18

What is catastrophe stock?

Answer 18

Principal is waived if a specified trigger of a natural disaster occurs

Question 19

What is a social impact bonds?

Answer 19

Financial deals designed to deliver both a financial and a social return

Question 20

What are securitized bonds

Answer 20

Bonds tied to expected cash flows from some underlying asset

Question 21

What are examples securitized bonds?

Answer 21

CDO: Collateralized debt obligation
ABS: Asset backed securities
MBS: Mortgage-backed securities

Question 22

What are the International type bonds?

Answer 22

1. Foreign bonds
2. Eurobonds
3. Global bonds
4. Dual currency bonds

Question 23

What are flat prices?

Answer 23

Bonds quoted net of accrued interest

Question 24

What is the invoice price?

Answer 24

Price that a buyer pays for bond including accrued interest

Question 25

What is the advantage and disadvantage of current yield?

Answer 25

Advantage: Simplest notion of return Disadvantage: Omits capital gains/losses from bond price changes

Question 26

What is the advantages and disadvantage of YTM?

Answer 26

Advantage: More precise Disadvantage: Assumes the coupon payments can be reinvested at the same rate and that the investor holds the bond until maturity

Question 27

What are the disadvantages of holding period return?

Answer 27

Ex-post measure Ignores reinvestment rate

Question 28

What is the advantage of the Realized compound return?

Answer 28

Also an ex-post measure

Question 29

What are the two types of methods for analyzing annualize bond yields?

Answer 29

1. Bond equivalent yield 2. Effective annual yield

Question 30

What are the determinant of bond qualities?

Answer 30

1. Coverage ratios 2. Leverage ratios 3. Liquidity ratios 4. Profitability ratios 5. Cash flow-to-debt ratio

Question 31

What are the protective covenant of bond indentures?

Answer 31

1. Sinking funds 2. Subordination of further debt 3. Dividend restrictions 4. Ratio covenants 5. Collateral

Question 32

What are Credit default swaps?

Answer 32

An insurance policy on the default risk of a bond or loan

Question 33

What are key parameters to price/rate securitized bonds?

Answer 33

1. Default probability 2. Correlation of defaults within portfolios 3. Correlation of defaults across portfolios 4. Collateral recovery rates for defaulted bonds