Reading 42. Fixed-income securities: defining elements
bond-most common type of fixed-income security
based on relative probability of default
42a.Describe basic features of a fixed-income security.
features of fixed-income security include specification of:
Issuers of Bonds
types of entities that issue bonds when borrow money
包括：corporations
sovereign national governments
non-sovereign national governments
quasi-government entities
supranational entities
Bond Maturity
term to maturity
perpetual bonds
money market securities
capital market securities
Par value
principal amount
premium
discount
at par
Coupon Payments
plain vanilla
conventional
zero-coupon
pure discount bonds
Currencies
dual-currency bond
currency option bond
42b. Describe content of a bond indenture.
42c. Compare affirmative and negative covenants and identify examples of each.
trust deed
bond indenture
negative covenants
affirmative covenants
42d. Describe how legal, regulatory and tax considerations affect the issuance and trading of fixed-income securities.
domestic bonds
national bond market
foreign bonds
eurobonds
global bonds
bearer
registered bonds
Issuing entities
special purpose entities(SPEs)
securitiezed bonds
bankruptcy remote vehicles
Sources of repayment
Collateral and credit enhancements
unsecured bonds
secured bonds
collateral
equipment trust certificates
collateral trust bonds
debentures
mortgage-backed security(MBS)
covered bonds
credit enhancement
Taxation of Bond income
original issue discount(OID)
42e.Describe how cash flows of fixed-income securities are structured.
bullet
coupons
balloon payment
amortizing loan
fully amortizing
partially amortizing
sinking fund provisions
Floating-rate notes
floaters
reference rate
basis points
Other coupon structures
step-up coupon bonds
credit-linked coupon bond
payment-in-kind(PIK) bond
deferred coupon bond/split coupon bond
index-linked bond
inflation-linked bonds-linkers
principal protected bonds
different structures of inflation-indexed bonds
包括indexed-annuity bonds
indexed zero-coupon bonds
interest-indexed bonds
capital-indexed bonds
42f. Describe contingency provisions affecting the timing and/or nature of cash flows of fixed-income securities and identify whether such provisions benefit the borrower of the lender.
contingency provision
embedded options
straight/ option-free bonds
call option
styles of exercise for callable bonds:
american style
european style
bermuda style
make-whole call provisions
Putable bonds
put option
Convertible bonds
conversion price
conversion ratio
conversion value
Warrants
Contingent Convertible Bonds
Reading 43. Fixed-income Markets: issuance,trading and funding
43a. Describe classifications of global fixed-income markets.
type of issuer
credit quality
original maturities
capital market securities
coupon structure
currency denomination
geography
developed markets/emerging markets
indexing(index-linked bonds)
tax status
municipal bonds/ munis
43b. Describe the use of interbank offered rates as reference rates in floating-rate debt.
interbank money market
43c.Describe mechanisms available for issuing bonds in primary markets.
underwritten offering/ best efforts offering
syndicate
grey market
primary dealers
shelf registration
43d. Describe secondary markets for bonds.
43e. Describe securities issued by sovereign governments.
43f. Describe securities issued by non-sovereign governments,quasi-government entities and supranational agencies.
quasi-government
supranational bonds
43g. Describe types of debt issued by corporations
Bank debt
bilateral loan
syndicated loan
Commercial Paper
bridge financing
backup lines of credit/ liquidity enhancement/ backup liquidity lines
Corporate Bonds
serial bond issue
term maturity structure
medium-term notes(MTNs)
43h. Describe structured financial instruments
1)yield enhancement instruments
credit-lined note(CLN)
2)capital protected instruments
guarantee certificate
3)participation instruments
4)leveraged instruments
inverse floater
leveraged inverse floater
deleveraged inverse floater
43i. Describe short-term funding alternatives available to banks.
certificates of deposit(CDs)
negotiable certificates of deposit
central bank funds market
central bank funds rates
43j. Describe repurchase agreements(repos) and the risks associated with them.
repo agreement
repo margin/ haircut
reverse repo agreement
Reading 44. Introduction to fixed-income valuation
44a. Calculate a bond's price given a market discount rate.
yield-to-maturity(YTM)/ redemption yield
calculating the value of a bond with semiannual coupon payments.
44b. Identify the relationships among a bond's price, coupon rate, maturity and market discount rate.
Relationship between price and maturity
constant-yield price trajectory
44c. Define spot rates and calculate the price of a bond using spot rates.
44d. Describe and calculate the flat price, accrued interest and full price of a bond.
flat price
clean price / quoted price
dirty price
44e. Describe matrix pricing
matrix pricing
44f. Calculate annual yield on a bond for varying compounding periods in a year
44g. Calculate an interpret yield measures for fixed-rate bonds and floating-rate notes.
current yield(income yield/running yield)
simple yield
yield-to-call
yield-to-worst
Floating-rate note yields
44i. Define and compare the spot curve,yield curve on coupon bonds, par curve and forward curve.
yield curve
term structure
spot rate yield curve
yield curve for coupon bonds
par bond yield curve
forward yield curve
44j.Define forward rates and calculate spot rates from forward rates.
The relationship between short-term forward rates and spots rates
Forward rates given spot rates
Valuing a bond using forward rates
44k.Compare, calculate and interpret yield spread measures.
yield spread
benchmark spread
G-spread
interpolated spreads/ I-spreads
Zero-Volatility and Option-Adjusted Spreads
Reading 45. Introduction to asset-backed securities
45a. Explain benefits of securitization for economies and financial market
securitization-a process by financial assets (eg,mortgages,accounts receivable or automobile loans) are purchased by an entity that issues securities supported by cash flow from those financial assets.
primary benefits
1)a reduction in funding costs
2)increase in liquidity of underlying financial assets
securitization provide the benefits
45b.Describe securitization,including the parties involved in the process the roles they play.
securitization transaction
eg. Fred Motor Company
special purpose entity(SPE)
tranches
waterfall structure
mortgage-backed securities(MBS)
45c. Describe typical structures of securitizations, including credit tranching and time tranching.
credit tranching
senior/sub ordinated structure
time tranching
45d. Describe types and characteristics of residential mortgage loans that are typically securitized.
residential mortgage loans
loan-to-value ratio (LTV)
Maturity
Interest rate
fixed-rate mortgage
adjustable-rate mortgage(ARM)
variable-rate mortgage
index-referenced mortgage
convertible mortgage
Amortization of principal
fully amortizing
partially amortizing
interest-only mortgage
Prepayment provisions
prepayment penalty
Foreclosure
nonrecourse loans
recourse loans
45e. Describe types of characteristic of residential mortgage-backed securities
45f. Define prepayment risk and describe the prepayment risk of mortgage-backed securities.
agency RMBS
nonagency RMBS
mortgage pass-through securities
securitized mortgage
weighted average maturity (WAM)
weighted average coupon(WAC)
pass-through rates
Prepayment risk
Collateralized mortgage obligations
Sequential Pay CMO
Planned Amortization Class (PAC) CMO
PAC
support tranches
initial PAC collar
broken PAC
Nonagency RMBS
credit enhancement
shifting interest mechanism
45g.Describe characteristics and risks of CMB securities
Commercial mortgage-backed securities
nonrecourse loans
the analysis of CMBS structures focuses on 2key ratios to asset credit risk.
1)Debt-to-service-coverage ratio(DSC)
2)Loan-to-value ratio
loan-level call protection:
1)prepayment lockout
2)defeasance
3)prepayment penalty points
- yield maintenance charges
CMBS-level call protection
balloon payment
45h. Describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type.
Auto Loan ABS
Credit Card ASB
45i. Describe collateralized debt obligations, including their cash flows and risks.
collateralized debt obligations(CDO)
collateralized bond obligations（CBO)
collateralized loan obligations(CLO)
collateral manager
structural finance CDOs
synthetic CDOs
Reading 46: Understanding fixed income risk and return
46a. Calculate and interpret the sources of return from investing in a fixed-rate bond.
3 sources of returns
annualized holding period rate of return
market price risk
reinvestment risk
short investment horizon: market price risk大于reinvestment risk
long investment horizon: market price risk小于reinvestment risk
46b. Define, calculate and interpret Macaulay, modified and effective durations.
Duration
Macaulay Duration
Modified Duration
Approximate Modified Duration
Effective Duration
46c. Explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options.
46d. Define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the benchmark yield curve.
key rate duration
partial duration
46e. Explain how a bond's maturity,coupon and yield level affect its interest rate risk.
46f. Calculate the duration of a portfolio and explain the limitations of portfolio duration.
cash flow yield
parallel shift
46g.Calculate and interpret the money duration of a bond and price value of a basis point(PVBP).
money duration/ called dollar duration
=annual modified duration* full price of bond position
price value of a basis point((PVBP)
46h. Calculate and interpret approximate convexity and distinguish between approximate and effective convexity.
price-yield curve for an option-free figure
convexity
effective convexity
approximate effective convexity
46i. Estimate the percentage price change of a bond for a specified change in yield, given the bond's approximate duration and convexity.
change in full bond price= -annual modified duration(YTM) +0.5 annual convexity)2
46j. Describe how the term structure of yield volatility affects the interest rate risk of a bond.
term structure of yield volatility
46k. Describe the relationships among a bond's holding period return, its duration and the investment horizon.
duration gap
46i. Explain how changes in credit spread and liquidity affect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes.
