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65 Cards in this Set

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Negative covenant
prohibitions on the borrower, include sales of asset, negative pledge of collateral(can't claim same asset under several debt issues simultaneously), and restrictions on additional borrowing unless certain financial conditions are met.
affirmative covenants
actions that the borrowers promises to perform, include maintenance of certain financial ratios and timely payment of principal and interests.
accrual bonds
bonds that make no periodic interest payments prior to maturity, and usually sold at par with stated coupon rate interest accrues at a compound rate paid at maturity.
step-up notes
notes that have coupon rates that increase over time at a specified rate.
floating-rate secuirities
bonds with coupon interest vary based on a specified interest rate or index.
coupon formula for floating-rate bonds
new coupon rate = reference rate +/- quoted margin
price of bonds with accrued interest
full price = clean price + accrued interest
Amortizing secuities
secuities that make periodic interest and principal payments over the life of the bond.
prepayment
issue/borrowers right to accelerate the principal repayment on a loan
call provision
give the right (not the obligation) to retire all or a part of an issue prior to maturity.
call protection
period that a callable bond can't be called.
nonrefundable bonds
prohibit the call of and issue from a lower coupon bond issue.
sinking fund provision
provide for the repayment of principal through a series of payments over the life of the issue.
2 ways of sinking fund provision
1. Cash payment-issuer may deposit the required cash amount annually with trustee who will then retire the applicable proportion of bonds.
2. Delivery of securities- issues purchase bonds in certain year and deliver them to hte trustee who will retire them.
sinking fund methods, cash or delivery, which is better for issuer if bonds is traded below par?
delivery
sinking fund methods, cash or delivery, which is better for issuer if bonds is traded above par?
cash
convension option
grants holders of a bond the right to convert the bond into fixed number of common share of the issuer.
put provision
give the bondholders the right to sell the bond to the issuer at a specified price priot to the maturity.
floor
set a minimum on the coupon rate for a floating-rate bond.
caps
set the maximum on the coupon rate for a floating rate bond.
margin buying of bonds
borrowing funds from a broker or a bank to purchase securities where the securities themselves are the collateral for the margin loan.
repurchase(repo) agreement of bonds
an arrangement by which an institution sells a security with a commitment to buy it back at a later date at a specified price.
repo rate
the annualized % difference b/w the two prices.
overnight repo
one day repurchase agreement
term repo
repurchase agreement covering a longer period.
interest rate risk
risk associates with interest rate changes. when interest rate goes up, bond price goes down
measurement of interest risk is presented by..
duration
call risk
risk associates with the higher possibility of call option when market rate is low, thus result in a lower reinvestment rate.
prepayment risk
risk associates with the higher probability of prepayment option when market rate is low.
reinvestment risk
risks associate with reinvestment in a lower yield。
credit risk
the risk associates with the chance the bond rating degrade, resulting in higher return requirement.
liquidity risk
risk that the bond has less liquidity, resulting in lower selling price in liquidation.
duration with respect to maturity
longer maturity, greater the duration.
is it possible to have a callable bond with price higher than the call price?
no
duration with callable bonds compare to non-callable bonds
lower durations as higher end price are limited
duration of bonds with put options compare to non-puttable bonds
lower as lower price end has been limited
higher the coupon, lower or higher the duration?
LOWER
equation:
callable bond price with respect to non-callable bond price and call option value
callable bond price = option-free bond price - call option value.
relationship:
time lap of floating-rate bond and interest rat risk(duration)
longer the time lap, higher the duation
will a cap of floating rate bond increase or decrease the duration?
increase
formula:
duration with respect to bond price change and yield changes
duration = % change in bond price / % change in yield
3 disadvantage of callable and prepayable securities:
1. uncertainty about timing of cash flow
2.more probability of calling or prepaying the security when interest rate has decreased, result in higher reinvestment risk
3.upper limit of price result in call action
4 factors which affect reinvestment risk:
1. with call option
2. higher coupon, higher risk
3. amortizing security
4. has prepayment option
volatility risk, as for callable bonds, is the risk that the volatility increase or decrease?
increase
volatility risk, as for puttable bonds, is the risk that the volatility increase or decrease?
decrease
what is extenal market
bond markets in which bonds are created by syndicate simultaneously in serveral country
external bond market is also called:
eurobond market
three matority cycles of t-bill:
28,91,182
quote: 102-5, how to compute for treasurey bond
(102+5/32)% * face value
how long is the pay back period for treasury inflationed protected securities(TIPS)?
semiannual
formula:
TIPS coupon payment
TIPS coupon Payment = inflation-adjusted par value * stated coupon rate /2
on-the-run issues of treasury bonds
most recently aucioned treasury issues
off-the-run issues
older issues that have been replaced by most recently auction issue.
coupon strips
strips created from coupon payments
principal strips
principle payments without coupons(which is striped as coupon strips)
agency bonds
securities issued by various agencies and organizations of the U.S agnecy.
debentures
securities that are not backed by collateral.
commercial paper
short-term unsecured security for corperations to borrow lower than the bank rate
bank acceptance
letters from the banks that guraantees a loan will be repaid. It is often used in international trade.
dicount rate
rate at which the fed lend to banks
open market operation
the action of the fed to adjust interest rate by selling treasury securities to the public
4 ways of fed to adjust interest rate
1.change discount rate
2.open market operation
3.change bank reserve requirement
4.persuade banks to change credit policies
pure expectation theory
yield for a particular maturity is an average of the short term rate that are expected in the future
liquidity preference theory
expectations about future short term rates, investors require a premium for holding longer term bonds
current yield
annual cash coupon flow/ bond price