Week 10 - Topic 9 - Debt securities Flashcards
(20 cards)
What are ‘debt securities’?
Facilitate direct loans between lenders (surplus units) and borrowers (deficit units), bypassing intermediaries
What are the 2 types of debt securities?
- Discount securities
- Bonds
What are ‘Discount securities’?
short-term loans of less than 12 months that DO NOT pay interest.
What are ‘Bonds’?
medium to long-term loans greater than 12 months that pay regular interest.
What are the 3 important features of all debt security contracts, and what are they?
- Maturity –> The date the debt security ends and is marked by the return of capital to the lender.
- Face value –> The fixed amount of capital returned to the lender at contract maturity.
- Price –> The initial amount of money lent to the borrower by the lender, when the security is first traded at creation (primary market).
Fill in the following one-word gaps: There is an _______ relationship between Price and Return. The higher the price, the ______ the return, and the lower the price, the ______ the return.
Inverse, lower, higher
Define the term ‘Coupon’?
interest rate.
What is ‘debt financing’?
Issuing debt securities allows borrowers (corporations/governments) to raise capital from investors.
Define ‘Investor Returns’?
Bonds pay periodic interest, while discount securities (like T-bills) repay full face value at maturity.
What are the 2 things that the debt securities market is formed of?
- Short-term Money Market (MM)
- Long-term Bond/Fixed-Interest Market
What are the characteristics of discount securities which promote liquidity and allow for the effective transfer of capital from surplus to deficit units?
- Low default risk, transaction costs, high marketability & a deep pool of buyers and sellers.
- Large denominations with standardised attributes (e.g. standard Face Value, risk, discount rate). Short-term, standardised maturities (often 30, 90 or 180 days).
Name 4 examples of discount securities and their issuers?
- Treasury notes and Repurchase Agreements (Federal gov.)
- Commercial paper (State gov. & large corp.)
- Negotiable Certificates of Deposit & Bank Accepted Bills (Banks)
- Promissory notes (Institutions at least as credit worthy as banks)
What is ‘Maturity match’?
Bonds help corporates and governments reduce liquidity risk by funding long-term assets with long-term liabilities, aligning cash inflows with outflows.
What is an ‘Unsecured note’?
a bond that has no specified security attached as collateral in the case of default.
What are the 2 forms that debentures come in, and what are they?
- Fixed → holders have the right to the proceeds of the sale of the assets specified in the debenture should the bond default.
- Floating → holders have the right to the proceeds of sale of the assets specified in the debenture that are not already pledged against a fixed charge in any other debenture in the case of default as well.
Define the term ‘Senior debt’?
giving bondholders first priority to the firm’s assets (after secured claims are satisfied).
Define the term ‘Subordinated (junior) debt’?
Bondholders’ claims to the company’s assets rank behind senior debt.
What are ‘Financial guarantees’?
Unconditional offers from a private sector guarantor to cover the payment of principal and interest to investors in debt securities in the event of a default.
Define the term ‘Yield to maturity’?
is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
Define the term ‘Realised yield’?
is the return earned on a bond given the cash flows received by the investor.
