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52 Cards in this Set

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  • Back
Def: bond indenture
the contract that specifies all the rights and obligations of the issuer and owners of fixed income security.
Def: negative covenant
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
Def: affirmative covenants
the maintenance of certain financial ratios and the timely payment of principal and interest.
what is frequency of interest payment of treasury and us corporate bonds?
semiannual often.
Def:Accrual bonds
a bond issued at closed to par value and pay interest at the end of the mature day, the interest is compounded.
Def:step-up notes
bonds that have coupon rates that increase over time at a specified rate.
Def: deferred-coupon bonds
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.
equation: full price of bonds
clean price + accrued interest
Def: cum coupon
bonds trade with the next coupon attached
Def: ex coupon
bond trades without the right to the next coupon
Def: Amortizing securities
securities that make periodic interest and principal payments over the life of the bond.
def: call protection
the time at which a callable bond can't be called
def: refunding bonds
to call old bonds by issuing new bonds with lower coupon.
Def: sinking fund provision
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.
Def: conversion option
option that grants holders of bonds the right to convert the bond into a fixed number of common share.
Def: put provisions
option to holders of bonds to sell the bond to the issuer at certain days b4 the mature day.
def: duration of bonds
a measurement of interest rate risk in bonds
relationship among bonds' duration, maturity and coupon
same coupon, longer maturity, higher duration;same duration, higher coupon, lower duration.
call option bonds vs. option-free bonds: duration, which is higher, why?
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
put option bonds vs. option-free bonds: duration, which is higher, why?
put option bonds have lower duration since they have price floor(which is the put price)
relationship b/w the reset period of floating rate bonds and duration
longer the period, hihger the duration.
def: cap risk
an interest rate risk of floating rate bonds which occur when the interest rate peak above the cap
execept for cap and reset period, what makes floating rate bonds differ from par?
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
equation: % change in price
% change in price = - duration X % change in yields
disadvantages of callable and prepayment bonds to investor.
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
the security has more reinvestment risk when
1.higher coupon option
3.amortizing security
4.prepayment option
def: credit spread risk
the fact that the maket required for default risk premium changes even the rating of company rate increase in credit spread increases the requirment for yields hence decrease the bond price
Def: bid-ask spread
a measurement of liquidity risk, which is expressed by the differences b/w the selling price(ask)and buying price(bid)
internal bond market is comprised of:
domestic bond market and foreign bond market
Def: striped treasury
the treasury notes or bonds that have coupon striped by investment bankers. it is treated as zero coupon bond
Def: agency bond
bonds issues by crown coporations.
Def: debenture
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.
Mortgage-Backed Securities - MBS
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.
Collateralized Mortgage Obligation - CMO
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.
Motivation for creating collateralized mortgage obligations(CMO)
redistribute the prepayment risk inherent in mortgege passthrough securities and/or create securities with various maturity ranges.
General Obligation Bond - GO
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.
Revenue Bond
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.
Refunded Bond
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.
Medium Term Note
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.
absolute yield spread
yield of higher yield bond - yield of lower yield bond
relative yield spread
absolute yield spread / yield of lower-yield bond
yield ratio
yield ratio = higher yield / lower yield
most common type of yield spread is
absolute yield spread
credit (quality) spread of bonds
the differences in yields b/w two bonds with same features except credit rating
relationship: liquidity and issue size
larger the yield size, higher the liquidity, lower the yield spreads.
3 basic steps of bond valuation
1.estimate cash flow over the life of the security
2.eastimate the discount rate base on the risk
3.calculate the present value
3 situation in which adds uncertainty about cash flow of bonds
1. the principle repayment stream is uncertain. (call options, sinking fund provision, repayment option) payment is not certain(floating rate bonds)
3.convertible bonds
3 sources of return on bond payment gain
3.gain from reinvestment of coupon payment
equ: current yield
current yield = annual coupon / bond price
Largest to smallest: coupon rate , current yield, yield to maturity, bond sells at par
Largest to smallest: coupon rate , current yield, yield to maturity, bond sells at discount
Largest to smallest: coupon rate , current yield, yield to maturity, bond sells at premium