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Fixed Income
47 flashcards
A corporate bond is a debt security issued by a company, used to raise capital for operations, expansions, or acquisitions.
A bond is a debt instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). The issuer is obligated to pay interest (the coupon) and repay the principal at maturity.
The key characteristics are par value (face/principal amount), coupon rate, maturity date, callability, tax status, and credit rating.
Par value is the principal amount borrowed that the issuer agrees to repay at maturity. It is also used to calculate periodic interest payments.
The coupon rate is the annual interest rate paid by the issuer, expressed as a percentage of the par value.
The maturity date is the date when the issuer must repay the principal amount borrowed.
Callable bonds allow the issuer to redeem or 'call' the bond prior to maturity at a pre-specified call price.
A bond's yield is the total return an investor receives, accounting for periodic interest payments and price changes.
Current yield is the annual interest payment divided by the current market price of the bond. It does not account for capital gains/losses.
YTM is the total return anticipated if the bond is held to maturity. It accounts for the bond's current market price, par value, coupon interest payments, and time to maturity.
Key factors are interest rates, time to maturity, credit quality, embedded options, tax status, and market supply and demand.
Credit risk is the risk that the issuer defaults and fails to make interest payments or repay principal.
A credit rating is an assessment of the creditworthiness of a bond issuer by rating agencies like Moody's and S&P. Higher ratings indicate lower credit risk.
Credit analysis evaluates the ability of the bond issuer to meet scheduled interest and principal payments by analyzing factors like cash flows, leverage, liquidity, etc.
Interest rate risk is the risk that changing interest rates will decrease a bond's price. As rates rise, bond prices fall and vice versa.
Duration measures a bond's price sensitivity to changes in interest rates. Higher duration means greater sensitivity.
Convexity measures how duration changes as interest rates change. It estimates the error in duration's estimate of price change.
Reinvestment risk is the risk that coupon payments will be reinvested at lower interest rates than the bond's coupon rate.
MBS are bonds backed by a pool of mortgage loans, with payments derived from homeowners' mortgage payments.
Prepayment risk for MBS is the risk that faster mortgage prepayments will cause earlier return of principal and less interest.
ABS are bonds backed by pools of assets like credit card debt, auto loans, or student loans.
Inflation risk is the risk that rising inflation will decrease the purchasing power and real return of a bond's future cash flows.
A bond index measures the performance of a basket of bonds with similar characteristics, like the Bloomberg Barclays Aggregate Bond Index.
Yield curve risk is the risk of holding bonds as the yield curve shape changes, which can affect bond prices differently based on maturities.
High-yield bonds are bonds with lower credit ratings and higher default risk, issued by less creditworthy companies. They offer higher yields to compensate for risk.
Floating-rate bonds have variable coupon payments that are periodically reset based on a reference rate like LIBOR.
OAS is the spread that must be added to a benchmark yield curve to arrive at a bond's fair market value, accounting for embedded options.
Agency securities are bonds issued by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac. They are not explicitly backed by the U.S. government.
The TED spread is the difference between interest rates on interbank loans and short-term U.S. government debt, often viewed as a credit risk indicator.
Municipal bonds are debt securities issued by state and local governments or their agencies to fund public projects or obligations. Their interest is usually exempt from federal income tax.
Tax-exempt bonds are bonds whose interest income is exempt from federal and/or state income tax, like municipal bonds.
Taxable municipal bonds are issued by municipalities but do not qualify for federal tax exemption. They may still be exempt from state/local taxes.
BABs were taxable municipal bonds that carried federal tax credits or subsidies for municipal issuers to incentivize infrastructure investment.
Bond insurers guarantee scheduled principal and interest payments on a bond issue if the issuer defaults, in exchange for insurance premiums.
Brady bonds were bonds issued by developing countries in the wake of the 1980s debt crisis as part of debt restructuring.
Sovereign bonds are bonds issued by national governments in their own currencies to finance government spending.
Yankee bonds are U.S. dollar-denominated bonds issued in the U.S. by foreign entities like companies and governments.
Samurai bonds are yen-denominated bonds issued in Tokyo by non-Japanese issuers.
Bond stripping separates a bond's periodic interest and principal repayments into individual securities that can be traded.
Zero-coupon bonds pay no periodic interest, instead being issued at a deep discount to par value that reflects the total interest earned until maturity.
Serial bonds are a series of bonds which mature at different times with portions of the principal being repaid in installments over time.
An amortizing bond is one where portions of both principal and interest are repaid with each scheduled payment over the life of the bond.
Perpetual bonds are bonds with no maturity date, with issuers paying coupons indefinitely unless called.
A deferred-coupon bond is one that delays coupon payments for an initial period, compensating with a higher reinvestment rate after the deferral period.
Contingent capital bonds allow banks to either convert the bonds to equity or write down principal in times of financial stress.
An IO security receives cash flows based only on the interest portion of an underlying pool of mortgages or debt instruments.
A PO security receives the principal portion of cash flows from an underlying pool of mortgages or debt instruments.