Cfa L1 Fixed Income V.2

Front 1

Negative covenant

Back 1

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.

Front 2

affirmative covenants

Back 2

actions that the borrowers promises to perform, include maintenance of certain financial ratios and timely payment of principal and interests.

Front 3

accrual bonds

Back 3

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.

Front 4

step-up notes

Back 4

notes that have coupon rates that increase over time at a specified rate.

Front 5

floating-rate secuirities

Back 5

bonds with coupon interest vary based on a specified interest rate or index.

Front 6

coupon formula for floating-rate bonds

Back 6

new coupon rate = reference rate +/- quoted margin

Front 7

price of bonds with accrued interest

Back 7

full price = clean price + accrued interest

Front 8

Amortizing secuities

Back 8

secuities that make periodic interest and principal payments over the life of the bond.

Front 9

prepayment

Back 9

issue/borrowers right to accelerate the principal repayment on a loan

Front 10

call provision

Back 10

give the right (not the obligation) to retire all or a part of an issue prior to maturity.

Front 11

call protection

Back 11

period that a callable bond can't be called.

Front 12

nonrefundable bonds

Back 12

prohibit the call of and issue from a lower coupon bond issue.

Front 13

sinking fund provision

Back 13

provide for the repayment of principal through a series of payments over the life of the issue.

Front 14

2 ways of sinking fund provision

Back 14

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.

Front 15

sinking fund methods, cash or delivery, which is better for issuer if bonds is traded below par?

Back 15

delivery

Front 16

sinking fund methods, cash or delivery, which is better for issuer if bonds is traded above par?

Back 16

cash

Front 17

convension option

Back 17

grants holders of a bond the right to convert the bond into fixed number of common share of the issuer.

Front 18

put provision

Back 18

give the bondholders the right to sell the bond to the issuer at a specified price priot to the maturity.

Front 19

floor

Back 19

set a minimum on the coupon rate for a floating-rate bond.

Front 20

caps

Back 20

set the maximum on the coupon rate for a floating rate bond.

Front 21

margin buying of bonds

Back 21

borrowing funds from a broker or a bank to purchase securities where the securities themselves are the collateral for the margin loan.

Front 22

repurchase(repo) agreement of bonds

Back 22

an arrangement by which an institution sells a security with a commitment to buy it back at a later date at a specified price.

Front 23

repo rate

Back 23

the annualized % difference b/w the two prices.

Front 24

overnight repo

Back 24

one day repurchase agreement

Front 25

term repo

Back 25

repurchase agreement covering a longer period.

Front 26

interest rate risk

Back 26

risk associates with interest rate changes. when interest rate goes up, bond price goes down

Front 27

measurement of interest risk is presented by..

Back 27

duration

Front 28

call risk

Back 28

risk associates with the higher possibility of call option when market rate is low, thus result in a lower reinvestment rate.

Front 29

prepayment risk

Back 29

risk associates with the higher probability of prepayment option when market rate is low.

Front 30

reinvestment risk

Back 30

risks associate with reinvestment in a lower yield。

Front 31

credit risk

Back 31

the risk associates with the chance the bond rating degrade, resulting in higher return requirement.

Front 32

liquidity risk

Back 32

risk that the bond has less liquidity, resulting in lower selling price in liquidation.

Front 33

duration with respect to maturity

Back 33

longer maturity, greater the duration.

Front 34

is it possible to have a callable bond with price higher than the call price?

Back 34

no

Front 35

duration with callable bonds compare to non-callable bonds

Back 35

lower durations as higher end price are limited

Front 36

duration of bonds with put options compare to non-puttable bonds

Back 36

lower as lower price end has been limited

Front 37

higher the coupon, lower or higher the duration?

Back 37

LOWER

Front 38

equation:
callable bond price with respect to non-callable bond price and call option value

Back 38

callable bond price = option-free bond price - call option value.

Front 39

relationship:
time lap of floating-rate bond and interest rat risk(duration)

Back 39

longer the time lap, higher the duation

Front 40

will a cap of floating rate bond increase or decrease the duration?

Back 40

increase

Front 41

formula:
duration with respect to bond price change and yield changes

Back 41

duration = % change in bond price / % change in yield

Front 42

3 disadvantage of callable and prepayable securities:

Back 42

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

Front 43

4 factors which affect reinvestment risk:

Back 43

1. with call option
2. higher coupon, higher risk
3. amortizing security
4. has prepayment option

Front 44

volatility risk, as for callable bonds, is the risk that the volatility increase or decrease?

Back 44

increase

Front 45

volatility risk, as for puttable bonds, is the risk that the volatility increase or decrease?

Back 45

decrease

Front 46

what is extenal market

Back 46

bond markets in which bonds are created by syndicate simultaneously in serveral country

Front 47

external bond market is also called:

Back 47

eurobond market

Front 48

three matority cycles of t-bill:

Back 48

28,91,182

Front 49

quote: 102-5, how to compute for treasurey bond

Back 49

(102+5/32)% * face value

Front 50

how long is the pay back period for treasury inflationed protected securities(TIPS)?

Back 50

semiannual

Front 51

formula:
TIPS coupon payment

Back 51

TIPS coupon Payment = inflation-adjusted par value * stated coupon rate /2

Front 52

on-the-run issues of treasury bonds

Back 52

most recently aucioned treasury issues

Front 53

off-the-run issues

Back 53

older issues that have been replaced by most recently auction issue.

Front 54

coupon strips

Back 54

strips created from coupon payments

Front 55

principal strips

Back 55

principle payments without coupons(which is striped as coupon strips)

Front 56

agency bonds

Back 56

securities issued by various agencies and organizations of the U.S agnecy.

Front 57

debentures

Back 57

securities that are not backed by collateral.

Front 58

commercial paper

Back 58

short-term unsecured security for corperations to borrow lower than the bank rate

Front 59

bank acceptance

Back 59

letters from the banks that guraantees a loan will be repaid. It is often used in international trade.

Front 60

dicount rate

Back 60

rate at which the fed lend to banks

Front 61

open market operation

Back 61

the action of the fed to adjust interest rate by selling treasury securities to the public

Front 62

4 ways of fed to adjust interest rate

Back 62

1.change discount rate
2.open market operation
3.change bank reserve requirement
4.persuade banks to change credit policies

Front 63

pure expectation theory

Back 63

yield for a particular maturity is an average of the short term rate that are expected in the future

Front 64

liquidity preference theory

Back 64

expectations about future short term rates, investors require a premium for holding longer term bonds

Front 65

current yield

Back 65

annual cash coupon flow/ bond price