Fix-Income Security

Front 1

Bond indenture

Back 1

The contract specifies all the rights and obligations of the issuer and the owners of a fixed income security

Front 2

Covenants

Back 2

Contract provisions

Front 3

Negative covenants

Back 3

provisions on borrower, restrictions on asset sales, negative pledge of collateral, restrictions on additional borrowings

Front 4

Affirmative covenants

Back 4

actions that the borrower promises to perform, maintenance of certain financial ratios (avoid technical default) and the timely payment of principal and interest

Front 5

Straight bond

Back 5

Option-free bond

Front 6

Coupon rate structures

Back 6

Zero-coupon bonds
Step-up notes: have coupon rates that increase over time at a specified rate
Deferred coupon bonds: carry coupons, but the initial coupon payments are deferred for some period
Floating-rate securities: coupon interest payments over the life of the security vary based on a specified interest rate of index
Inverse floater: is a floating-rate security: constant rate - reference rate
Cap: maximum on interest rate paid by the borrower
Floor: minimum on the periodic coupon interest payments
Collar: cap & floor

Front 7

Dirty price/full price

Back 7

Clean price + accrued interest

Front 8

Trading flat

Back 8

Issuer of the bond is default
The bond will trade without accrued interest

Front 9

Bullet bond/bullet maturity

Back 9

Interest and principal payments at maturity

Front 10

Amortizing securities

Back 10

Periodic interest and principal

Front 11

Prepayment option

Back 11

Give the issuer/borrower the right to accelerate the principal repayment on a loan

Front 12

Call provisions

Back 12

Give the issuer the right to retire all or a part of an issue prior to maturity

Front 13

The period of call protection

Back 13

The period of years after issuance during which the bonds cannot be called

Front 14

Nonrefundable bonds

Back 14

Prohibit the call of an issue using the proceeds from a lower coupon bond issue

Front 15

Sinking fund

Back 15

Provide for the repayment of principal through a series of payments over the life of the issue
Cash payment:
Delivery of securities:

Front 16

An accelerated sinking fund provision

Back 16

Allows the issuer the choice of retiring more than the amount of bonds specified in the sinking fund requirement

Front 17

Regular redemption prices

Back 17

Under call provisions specified in the bond indenture

Front 18

Special redemption prices

Back 18

Sinking fund provisions
Property sale mandated by government authority

Front 19

Conversion option

Back 19

Grants the holder of a bond the right to convert the bond into a fixed number of common shares of the issuer

Front 20

Put provision

Back 20

Give bondholder the right to sell the bond to issuer at a specified price prior to maturity

Front 21

Floors

Back 21

Set a minimum on the coupon rate for floating-rate bond

Front 22

Margin buying

Back 22

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

Front 23

A repurchase (repo) agreement

Back 23

An arrangement of institution to sells a security with a commitment to buy it back at a later date at a specified higher price

Front 24

Overnight repo vs. Term repo

Back 24

one night vs. more time

Front 25

Interest rate risk

Back 25

Interest rate increases, bond price decreases
Duration is measure

Front 26

Call risk

Back 26

Reinvested at the new lower rates

Front 27

Yield curve risk

Back 27

Shape of yield curve
Relation between yield and maturity change

Front 28

Prepayment risk

Back 28

Rate falls, causing prepayment increase
Reinvested at the new lower rates

Front 29

Reinvestment risk

Back 29

The cash flow from fixed-income securities must be reinvested at lower rates
Noncallable zero-coupon bond has no reinvestment risk

Front 30

Credit risk

Back 30

The risk that credit-worthiness of bond’s issuer deteriorate

Front 31

Volatility risk

Back 31

Present for fixed-income securities that have embedded options, such as call option, prepayment options, or put options

Front 32

Sovereign risk

Back 32

The credit risk of a sovereign bond issued by a country other than the investor’s home country

Front 33

Trade at par value

Back 33

When the coupon rate is equal to its market yield

Front 34

Trade at a discount to its par value

Back 34

Price is less than par value
Coupon rate is less than market yield

Front 35

Trade at a premium to its par value

Back 35

Price is greater than par value
Coupon rate is greater than market yield

Front 36

Callable bond value

Back 36

Value of option-free bond - value of embedded call option

Front 37

Floating-rate bond

Back 37

Decrease interest rate risk
Price at near par value
Cap increase interest rate risk in floating-rate bond

Front 38

Duration

Back 38

= - price change in bond price/yield change in percent
Zero-coupon bond: duration= number of years to maturity
Floating-rate bond: the fraction of a year until the next reset date

Front 39

Yield on risky bond

Back 39

Yield on a default-free bond + credit spread

Front 40

Senior, junior, subordinated bond

Back 40

Ratings of senior bond > rating of junior bond > rating of subordinated bond

Front 41

Investment grade

Back 41

AAA -> BBB

Front 42

Speculative grade/junk bond

Back 42

BB ->

Front 43

D

Back 43

Currently default

Front 44

Liquidity

Back 44

Bid-ask spread is an indication of the liquidity of the market for security

Front 45

Marking to market

Back 45

The periodic valuation

Front 46

Value of a putable bond

Back 46

Value of an option-free bond + value of the put

Front 47

Volatility risk

Back 47

For a callable bonds is the risk that volatility will increase
For a putable bonds is the risk that volatility will decrease