Reading 42 Flashcards
1
Q
type of bond with contingency provision (embedded option)
A
- callable bonds
- putable bonds
- convertible bonds
2
Q
Callable bonds
A
give the issuer the right to redeem all or part of the bonds before maturity date
- high yield & low price compensate the bondholder for the vale of the call option to the issuer
- provide protection to the issuer in decline interest rate environment
3
Q
contingency provision is?
A
clause in legal document that allows for some action if the event does occur
4
Q
embedded option
A
various contingency provision found in the indenture
5
Q
puttale bonds
A
- put provision
- provide right to the bonholder to sell the bond back to the issuer at a pre-determined price ona specified date
- lower yield on these bonds compensate the issuer for the value of the put option
- pre-specified selling price of putable bond provide benefit to the bondholder
6
Q
conversion price
A
price per share - convertible bond can be converted into shares
7
Q
conversion ratio
A
number of common shares that each bond can be converted into
8
Q
conversion value
A
current share price x conversion ratio
9
Q
convertible bonds advantage for investors?
A
- can participate in equity upside
- receive downside protection
- price of convertible bond can’t fall below the price of the straight bond
10
Q
convertible bond
A
hybride security with both debt and equity features (bondholder has a right to exchange the bond for specified number of shares in issuing company).
- price of a convertible bond is higher than the price of the bond without this provision
11
Q
convertible bond may futher include what ?
A
call provision
12
Q
tax consideration
A
- income portion of a bond investment
- capital gain / loss if the price is likely to have changed compared with the purchased price
- different tax rate for long term and short term capital gains in different countries
13
Q
income portions of a bond investment
A
- taxed at ordinary income tax rate
- tax-exempt securities (municipal bonds, US TREASURY SECURITIES) is exempt from federal income tax and from the income tax of the state in which the bonds are issued.
14
Q
principal repayment structures
A
- bullet, amortization bond (full and partial)
- sinking fund arrangements
15
Q
bullet bonds
A
entire principle payment happens at maturity
16
Q
amortization bond
A
periodic payment of interest and repayment of principle
17
Q
partial amortized bond
A
fixed period payment until maturity & a portion of the principal at maturity date
- ballon payment
18
Q
ballon payment
A
payment to retire the bonds outstanding principal at maturity
19
Q
sinking funds
A
issuer plan to set aside funds over time to retire the bond
20
Q
benefitsof sinking fund arrangement
A
formal plan to retire the debt
21
Q
disadvantages of sinking fund arrangement
A
- reinvestment risk
- issuer may have option to repurchase bonds at below market price
22
Q
bermuda-style call
A
issuer has the right to call bonds on a species fate following the call protection period
23
Q
coupon payment structure
A
- floating rate
- step up coupon bond
- credit link
- payment in kind
- deferred coupon
- index linked
24
Q
deferred coupon bond
A
- paid no coupon for the first few years & pays higher than normal coupon for the remainder of its life
- common in project financing
- priced at significant discount to par.
25
index-linked bond
coupon & or principal repayment are linked to a specific index.
example: inflation-linked bond
- real interest rate= nominal interest rate - inflation
- equity-linked notes
26
real interest rate formula
nominal interest rate - inflation
27
equity-linked notes
final payment is based on the return of an equity index.
28
coupon
interest payment that the bond issuer makes to the bondholders
- usually, coupon is paid semi-annual for sovereign & corporate bond
29
credit-linked coupon bonds
- coupon rate change when bonds credit rating change
| - attractive to investors who are concerned about the future creditworthiness of the issuer
30
payment-in-kind coupon bond
coupon is paid in the form of additional amounts of the bonds issue rather than as a cash payment
- favored when issuer future cash flow will be questionable
31
step-up coupon bond
- fixed or floating couping which increase by specified margin at specified dates
- provides some protection against rising interest rates.
32
floating rate note
- coupon rate is linked to an external reference rate -LIBOR
little interest rate risk
additional features may include floor or cap
- typical coupon rate
- variable rate note
- inverse floater
33
typical coupon rate
3M libor + ... bps(spread)
34
variable rate note
spread is not fixed
35
inverse floater
inverse relationship to the reference rate
36
fixed income security
an instrument that allows gov, companies & other types of issuers to borrow money from investors
- adding fixed securities to portfolio add diversification benefits
37
adding fixed income securities to a portfolio does what ?
add diversification
38
maturity date
date when the issuer is obligated to redeem the bond by paying the outstanding principal.
39
tenor
time remaining until maturity
40
money market securities
maturities at insurance of 1 year or less
41
capital market securities
fixed securities with maturity more than 1 yr
42
3 important elements of bond investing
- the bonds features
- legal, regulatory & tax consideration
- contingency provision
43
par value
principal or par value amount that the issuer agrees to repay the bondholder on maturity date
44
credit risk
risk of loss resulting from the issuer failing to make full & timely payment of interest/ principal
45
major type of bond issuer are:
- supranational organization (IFM, world bank)
- quasi-gov bonds
- corporate issuers
- non-sovereign gov bonds (cities)
- sovereign gov bonds (fed)
46
current denomination
- dual currency bonds
| - currency option bonds
47
dual currency bonds
pay interest in one currency & principal in another currency
48
currency option bonds
single currency bond + foreign currency option
49
coupon rate and frequency
- coupon/ nominal rate
- plain vanilla bond
- floaters
- zero coupon bonds
50
zero coupon bonds
issued at discount to par & reddem at par
51
floaters
bonds with floating rate coupon
52
plain vanilla bond
fixed rate bond
53
coupon/ nominal rate
interest rate that the issuer agrees to pay every year until maturity
54
yield to maturity
internal rate of return on bonds expected cash flow
- lower interest rate scenario anticipation, lower yield to maturity demand
55
current or running yield
bonds annual coupon / bonds price
56
bond indentures
- trust deed (indenture)
- collateral
- credit enhancement
- covenants
57
indenture (trust deed)
legal contract that describe:
- bond form
- issuer obligation
- bondholder rights
58
collateral
assets or financial guaranteed above & beyond the issuer promise to pay
59
credit enhancement
provision to reduce the credit risk of the bond issue
60
covenants
clauses that define bondholders right and an issuer's actions
61
bonds issuer is legally obligated to make what kind of payment?
contractual payments
62
source of repayment proceeds
- supernational organization
- sovereign bonds
- non-sovereign gov debt (bond)
- corporate bonds
- securitization
63
securitization
cash flow generated by one or more underlying financial assets
64
corporate bonds
issuer ability to generate cash flow from operations
65
non-soveriegn gov debt (bond)
- tax
- special tax or fees
- cash flow of project (financed with bond issue)
66
supranational organization
either the repayment or previous loans or the paid-in-capital from its members
67
sovereign bonds
tax revenue & print money is the major source of repayment
68
credit enhancement
- internal credit enhancement (subordination)
- > junior tranche
- > excess spread
- external credit enhancement
- > surety bond
- > letter of credit
69
credit enhancement
variety of provision that can be used to decrease the credit risk of a bond issue
70
surety bond
issued by a rated & regulated insurance company
71
letter of credit
provide by a financial institution
| -> less common form
72
internal credi enhancement (subordination)
ordering of claim priorities for ownership or interest in an asset
73
junior tranche
function as credit protection for senior tranche
74
excess spread
difference between cash flows received from the assets used to secure issue & the interest paid to investors
75
euro bonds
bond issued & traded on euro bond market
- bearer bond
- registered bond
76
bearer bonds
trustee does not keeep records of bonds ownerships
77
registered bonds
ownership is recorded by either name or serial number
78
national bond market
bond that are issued & traded in a specific country
79
legal & regulatory concerning fixed income?
fixed income securities are subject to legal and regulatory requirement
80
seniority ranking
- secured bonds
- debentures
- unsecured bonds
81
secured bonds
backed by asset or financial guarantees pledge to ensure debt repayment in case of default
82
debenture
types of bonds that can be unsecured
83
unsecured bonds
no collateral bond
84
covenants
- bonds covenants
- affirmative covenants
- negative covenants
85
bond covenants
legally enforceable rules that borrowers & lenders agree on at the time of a new bond issue
86
affirmative covenants
what issuer are required to do (admin nature)
87
negative covenants
what issuer are prohibited from doing (costly & do materially constrain the issuer potential business decision)
example: restriction on debt, negative pledges. restriction on prior claims restriction on investments
88
types of collateral backing
- collateral trust bonds
- equipments certificates
- mortgage backed securities
- covered bonds
89
collateral trust bonds
secured by securities such as shares other bonds or financial assets
90
equipment trust certificates
bonds secured by specific types of equipments or physical assets
91
mortgage-backed securities
debt obligations that represent claims to the cash flow from pools of mortgage loans
92
covered bonds
debt backed by a segregated pool of asset called cover pool.
