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30 Cards in this Set
- Front
- Back
bond indenture
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the contract that specifies all the rights and obligations of the issuer & owners of a fixed income security.
- Includes both negative and affirmative covenants |
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Negative vs. Affirmative Covenants
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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) |
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What is a "straight" bond?
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an option-free bond
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Zero-coupon bond
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a bond that does not pay periodic interest.
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Step-up notes
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notes that have coupon rates that increase over time at a specified rate. (may take place one or more times)
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Deferred-coupon bonds
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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.
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Coupon formula for a FRN
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new coupon rate = reference rate +/- quoted margin
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inverse floater
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a FRN with a coupon formula that increases the coupon rate when a reference rate decreases, and vice versa.
I.e. 12% - reference rate |
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what do you call an upper and lower limit on the rate of a FRN?
What do you call the combination |
"Cap & Floor"
Combination = "Collar" |
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clean price vs. dirty price (full price)
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clean price does not include accrued interest, dirty price includes accrued interest
Dirty Price = Clean price + accrued interest. |
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If the issuer of the bond is in default, the bond will trade without accrued interest and is said to be trading __________ .
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flat
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The redemption provisions for a bond refer to.......
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how, when, and under what circumstances the principal will be repaid.
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"nonamortizing" means
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they pay only interest until maturity, at which time par value is repaid.
(aka bullet bond, bullet maturity) |
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Amortizing securities
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make periodic interest and principal payments over the life of the bond. (i.e. mortage)
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Prepayment option
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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) |
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Call provision
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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) |
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call protection
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a stated period of years when the bonds cannot be called. once call protection has passed, the bonds are "currently callable"
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Nonrefundable bonds
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bonds that are callable but not to be refundable (refinancing).
A callable but nonrefundable bond can be called fo any reason other than refunding. |
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Sinking fund provision
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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) |
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What are the two ways that Sinking Fund Provisions may be acomplished?
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1) Cash payment
2) Delivery of securities |
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What is an Accelerated Sinking Fund Provision?
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allows the issuer choice of retiring more than the amount of bonds specified in sinking fund requirement.
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Regular Redemption Prices vs. Special Redemption Prices ?????
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"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. |
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What are some embedded options that benefit the lender? (3)
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1. conversion option
2. put provision 3. floor |
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What are some embedded options that benefit the issuer? (4)
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1. call provision
2. prepayment option 3. accelerated sinking fund provision 4. cap |
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Conversion option
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gives the bondholder the right to convert bond into a fixed number of common shares of the issuer.
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Margin Buying
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borrowing funds from a broker or bank to purchase securities where the securities themselves are the collateral for the margin loan.
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Repurchase (repo) agreement
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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.) |
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repo rate
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the theoretical interest rate on a repurchase agreement. (Annualized percentage difference)
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overnight repo vs. term repo
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overnight repo is a repurchase agreement for one day,
term repo is a repurchase agreemnt > 1 day |
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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.
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1. repurchase agreement
2. margin loan |