Study Session 15.1

Front 1

bond indenture

Back 1

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

- Includes both negative and affirmative covenants

Front 2

Negative vs. Affirmative Covenants

Back 2

Negative - Things the borrower can't do. (Sell assets pledged as collateral)

Affirmative - Things the borrower must do. (maintain certain financial ratios & timely pay principal and interest)

Front 3

What is a "straight" bond?

Back 3

an option-free bond

Front 4

Zero-coupon bond

Back 4

a bond that does not pay periodic interest.

Front 5

Step-up notes

Back 5

notes that have coupon rates that increase over time at a specified rate. (may take place one or more times)

Front 6

Deferred-coupon bonds

Back 6

have coupons but initial coupon payments are deferred for some period. The coupon payments accrue at a compound rate over the deferral period and are paid as a lump sum at the end of that period.

Front 7

Coupon formula for a FRN

Back 7

new coupon rate = reference rate +/- quoted margin

Front 8

inverse floater

Back 8

a FRN with a coupon formula that increases the coupon rate when a reference rate decreases, and vice versa.

I.e. 12% - reference rate

Front 9

what do you call an upper and lower limit on the rate of a FRN?

What do you call the combination

Back 9

"Cap & Floor"

Combination = "Collar"

Front 10

clean price vs. dirty price (full price)

Back 10

clean price does not include accrued interest, dirty price includes accrued interest

Dirty Price = Clean price + accrued interest.

Front 11

If the issuer of the bond is in default, the bond will trade without accrued interest and is said to be trading __________ .

Back 11

flat

Front 12

The redemption provisions for a bond refer to.......

Back 12

how, when, and under what circumstances the principal will be repaid.

Front 13

"nonamortizing" means

Back 13

they pay only interest until maturity, at which time par value is repaid.

(aka bullet bond, bullet maturity)

Front 14

Amortizing securities

Back 14

make periodic interest and principal payments over the life of the bond. (i.e. mortage)

Front 15

Prepayment option

Back 15

give issuer the right to accelerate the principal repayment on a loan.

(present in mortages / other amortizing loans)

(Includes additional uncertainty about CF to be received in comparison to a security that does not permit prepayment)

Front 16

Call provision

Back 16

gives issuer the right to retire all or part of an issue prior to maturity.

(If a bond is called, the borrowers must surrender their bonds at the call price)

Front 17

call protection

Back 17

a stated period of years when the bonds cannot be called. once call protection has passed, the bonds are "currently callable"

Front 18

Nonrefundable bonds

Back 18

bonds that are callable but not to be refundable (refinancing).

A callable but nonrefundable bond can be called fo any reason other than refunding.

Front 19

Sinking fund provision

Back 19

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

(This may be accomplished through either Cash payment or Delivery)

Front 20

What are the two ways that Sinking Fund Provisions may be acomplished?

Back 20

1) Cash payment
2) Delivery of securities

Front 21

What is an Accelerated Sinking Fund Provision?

Back 21

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

Front 22

Regular Redemption Prices vs. Special Redemption Prices ?????

Back 22

"Regular or General Redemption Prices" - These price tend to be above par until the first par call date. The price is typically known before the redemption occurs.

"Special Prices" - These occur because of certain events such as sinking funds, repossessions, forced sales, and eminent domain. These usually occur at par value but could be less, depending on the collateral backing the bonds.

Front 23

What are some embedded options that benefit the lender? (3)

Back 23

1. conversion option
2. put provision
3. floor

Front 24

What are some embedded options that benefit the issuer? (4)

Back 24

1. call provision
2. prepayment option
3. accelerated sinking fund provision
4. cap

Front 25

Conversion option

Back 25

gives the bondholder the right to convert bond into a fixed number of common shares of the issuer.

Front 26

Margin Buying

Back 26

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

Front 27

Repurchase (repo) agreement

Back 27

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

(The repurchase price > selling price and accounts for interest.)

Front 28

repo rate

Back 28

the theoretical interest rate on a repurchase agreement. (Annualized percentage difference)

Front 29

overnight repo vs. term repo

Back 29

overnight repo is a repurchase agreement for one day,

term repo is a repurchase agreemnt > 1 day

Front 30

Most bond-dealer financing is achieved through __________1____________ rather than through _____________2_______ . __________1__________ are not regulated by the FED, and the collateral position for the borrower is better in the event of bankruptcy of the dealer, since the security is owned by the lender.

Back 30

1. repurchase agreement

2. margin loan