Cfa Level 1 Fix Income Security

Front 1

Def: bond indenture

Back 1

the contract that specifies all the rights and obligations of the issuer and owners of fixed income security.

Front 2

Def: negative covenant

Back 2

the restriction on asset sales(company can't sell assets pledged as collateral),negative pledge of collateral(the company cant's claim that the same assets back several debt issues simultaneously), additional borrowings based on financial conditions

Front 3

Def: affirmative covenants

Back 3

the maintenance of certain financial ratios and the timely payment of principal and interest.

Front 4

what is frequency of interest payment of treasury and us corporate bonds?

Back 4

semiannual often.

Front 5

Def:Accrual bonds

Back 5

a bond issued at closed to par value and pay interest at the end of the mature day, the interest is compounded.

Front 6

Def：step-up notes

Back 6

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

Front 7

Def： deferred-coupon bonds

Back 7

bonds that defer its interest till the defer payment date, the interest is compounded b4 defer payment day, and after the date the interest is paid regularly.

Front 8

equation: full price of bonds

Back 8

clean price + accrued interest

Front 9

Def: cum coupon

Back 9

bonds trade with the next coupon attached

Front 10

Def: ex coupon

Back 10

bond trades without the right to the next coupon

Front 11

Def: Amortizing securities

Back 11

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

Front 12

def: call protection

Back 12

the time at which a callable bond can't be called

Front 13

def: refunding bonds

Back 13

to call old bonds by issuing new bonds with lower coupon.

Front 14

Def: sinking fund provision

Back 14

A means of repaying funds that were borrowed through a bond issue. The issuer makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market.

Front 15

Def: conversion option

Back 15

option that grants holders of bonds the right to convert the bond into a fixed number of common share.

Front 16

Def: put provisions

Back 16

option to holders of bonds to sell the bond to the issuer at certain days b4 the mature day.

Front 17

def: duration of bonds

Back 17

a measurement of interest rate risk in bonds

Front 18

relationship among bonds' duration, maturity and coupon

Back 18

same coupon, longer maturity, higher duration；same duration, higher coupon, lower duration.

Front 19

call option bonds vs. option-free bonds: duration, which is higher, why?

Back 19

call option bonds with lower duration since it sets cap for bond price(which is the call price)then it lower the interest risk associating with low interest rate

Front 20

put option bonds vs. option-free bonds: duration, which is higher, why?

Back 20

put option bonds have lower duration since they have price floor(which is the put price)

Front 21

relationship b/w the reset period of floating rate bonds and duration

Back 21

longer the period, hihger the duration.

Front 22

def: cap risk

Back 22

an interest rate risk of floating rate bonds which occur when the interest rate peak above the cap

Front 23

execept for cap and reset period, what makes floating rate bonds differ from par?

Back 23

the margin. it is fixed at a % of premium, which gives the credit risk and liquidation risk. when firms performance change or market condition change, credit risk and liquidation risk change

Front 24

equation: % change in price

Back 24

% change in price = - duration X % change in yields

Front 25

disadvantages of callable and prepayment bonds to investor.

Back 25

1.when interest rate is low, issuer is more likely to call or prepay the bond, which make the investment less profitalbe.
2. it lowers the appreciation of bonds by setting the cap price or prepay amount of cap price.
3.less cash flow stream is provided, hence obscure the timing of cash flow

Front 26

the security has more reinvestment risk when

Back 26

1.higher coupon
2.call option
3.amortizing security
4.prepayment option

Front 27

def: credit spread risk

Back 27

the fact that the maket required for default risk premium changes even the rating of company rate unchanged.an increase in credit spread increases the requirment for yields hence decrease the bond price

Front 28

Def: bid-ask spread

Back 28

a measurement of liquidity risk, which is expressed by the differences b/w the selling price(ask)and buying price(bid)

Front 29

internal bond market is comprised of:

Back 29

domestic bond market and foreign bond market

Front 30

Def: striped treasury

Back 30

the treasury notes or bonds that have coupon striped by investment bankers. it is treated as zero coupon bond

Front 31

Def: agency bond

Back 31

bonds issues by crown coporations.

Front 32

Def: debenture

Back 32

A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.

Front 33

Mortgage-Backed Securities - MBS

Back 33

A type of asset-backed security that is secured by a mortgage, or a collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Front 34

Collateralized Mortgage Obligation - CMO

Back 34

A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus.

Front 35

Motivation for creating collateralized mortgage obligations(CMO)

Back 35

redistribute the prepayment risk inherent in mortgege passthrough securities and/or create securities with various maturity ranges.

Front 36

General Obligation Bond - GO

Back 36

General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.

Front 37

Revenue Bond

Back 37

A municipal bond supported by the revenue from a specific project, such as a toll bridge, highway, or local stadium.This differs from general-obligation bonds, which can be repaid through a variety of tax sources. Revenue bonds are only payable from specified revenues.

Front 38

Refunded Bond

Back 38

Bonds that have their principle cash amount already held aside by the original issuer of the debt. A subset of the municipal and corporate bond classes, the funds required to pay off refunded bonds are held in escrow until the maturity date, usually by purchasing Treasury or agency paper.

Front 39

Medium Term Note

Back 39

A corporate note continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years.

Front 40

Equ
absolute yield spread

Back 40

yield of higher yield bond - yield of lower yield bond

Front 41

equ
relative yield spread

Back 41

absolute yield spread / yield of lower-yield bond

Front 42

equ
yield ratio

Back 42

yield ratio = higher yield / lower yield

Front 43

most common type of yield spread is

Back 43

absolute yield spread

Front 44

credit (quality) spread of bonds

Back 44

the differences in yields b/w two bonds with same features except credit rating

Front 45

relationship: liquidity and issue size

Back 45

larger the yield size, higher the liquidity, lower the yield spreads.

Front 46

3 basic steps of bond valuation

Back 46

1.estimate cash flow over the life of the security
2.eastimate the discount rate base on the risk
3.calculate the present value

Front 47

3 situation in which adds uncertainty about cash flow of bonds

Back 47

1. the principle repayment stream is uncertain. (call options, sinking fund provision, repayment option)
2.coupon payment is not certain(floating rate bonds)
3.convertible bonds

Front 48

3 sources of return on bond

Back 48

1.coupon payment
2.capital gain
3.gain from reinvestment of coupon payment

Front 49

equ: current yield

Back 49

current yield = annual coupon / bond price

Front 50

Largest to smallest: coupon rate , current yield, yield to maturity, bond sells at par

Back 50

CR=CY=YTM

Front 51

Largest to smallest: coupon rate , current yield, yield to maturity, bond sells at discount

Back 51

CR<CY<YTM

Front 52

Largest to smallest: coupon rate , current yield, yield to maturity, bond sells at premium

Back 52

CR>CY>YTM