Fixed Income Terms

What are the three kinds of covenants

Affirmative - A rule that must be met

Negative - Restrictions on the borrower

Cross-default clause

If the borrower defaults on one any other debt obligation then this debt will also be considered as defaulted

Pari Passu clause

States that this debt will have the same priority claim as the issuer’s of debt that ranks senior to it

Waterfall bond structure

Senior debtholders get paid first and then it waterfalls to junior debt holders

Step-up coupon

The coupon rate increases overtime

callable bond

Gives the ISSUER the right but not the obligation to redeem the bond at a predetermined call price. they have call risk for which they will demand a higher yield than an otherwise equivalent straight bond

puttable bond

gives the BONDHOLDER the right but not the obligation to sell back the bond to the issuing at a predetermined price, typically par. Typically offers a lower yield than an otherwise equivalent straight bond.

Eurobond

Issued outside the jurisdiction of any one country and are denominated

in a currency different from the currency of the countries in which they are sold

Competitive bids

used to set the price of the debt issue

noncompetitive bids

guaranteed to have their allocation met at the price

determined by the competitive bids

What is a cutoff yield.

The yield of the successful competitive bid with

the lowest price

What is a single-price auction

all

investors pay the price associated with this cutoff yield, regardless of the yield they

actually bid

multiple-price auction

successful competitive bidders actually

pay the price that they bid.

on-the-run bonds

Trading is most active for on-the-run bonds, which are the most recently issued government securities of a particular maturity. Their yields are typically used to represent default risk–free benchmark yields

Nonsovereign government bonds (the below are subsections of this)

ssued by states, provinces, and counties, and

by entities created to fund and provide services.

general obligation bonds

Local and regional government authorities. backed by local tax-raising powers or they can also issue revenue bonds to fund a specific project, where the source of repayment is fees from

the use of the infrastructure funded by the bond issue.

Agency bonds or quasi-government bonds

issued by entities that national

governments create for specific purposes, such as financing infrastructure investment

or providing mortgage financing. When they are backed by the sovereign entity, agency

bonds typically have yields and credit ratings closely aligned with those of the

government

Supranational bonds

are issued by international institutions such as the World Bank,

the IMF, and the Asian Development Ban

Correlation between price and YTM

Price and YTM are inversely related. An increase in YTM decreases the price, and a

decrease in YTM increases the price.

If a coupon rate is greater than YTM then will bond be at a premium or discount to par value

Premium

For a bond valued at a discount or premium, when will the price will converge to par value assuming the issuer does not default.

as the bond approaches maturity,

The percentage decrease in value when the YTM increases by a given amount is (Smaller/Larger/Same) than the increase in value when the YTM decreases by the same amount (the price-yield relationship is convex).

Smaller

Other things equal, the price of a bond with a longer/shroter maturity is more sensitive to a change in yield. This is also known as the maturity effect

Longer

Flat / Clean / Quoted Price

Price of a bond without accrued interest

Full / Dirty / Invoice Price

Includes interest accrued and price of the bond. Full price = Flat price - accrued interest

What is street convention

Yields calculated using the actual coupon dates even if they fall on a weekend

True Yield

Yields calculated on actual coupon dates which are first business day after a weekend if it lands on a weekend. These may be slightly lower compared to street convention

Current yield

Annual coupon cash flow divided by flat price

Simple yield

Annual coupon with amortization divided by flat price

G spread

Spread from government bonds

Interpolated / I-spreads

Spread compared to interest rate swaps

Z spread

Zero volatility

Quoted margin

The margin used to calculate the bond coupon payments

Required/discount Margin

The margin required to return the FRN to its par value

A yield curve

shows the YTMs for coupon bonds at various

maturities.

spot rate yield curve or zero curve

shows the YTMs for zero-coupon

bonds at various maturiti

par bond yield curve or par curve

may be constructed

from the spot curve to show the coupon rate that a hypothetical coupon bond at each

maturity would need to have to be priced at par.