Chapter 1 - credit event and floating rate...

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Chapter 1 - Features of Debt Securities 1. Introduction – Definition of a ‘fixed income security’ – concept of borrower and lender (creditor) 2. The promises of the issuer and the rights of the bondholders are set forth in great detail in the bond indenture. Affirmative covenants are the activities that the borrower promises to do (pay interest and principal on a timely basis, pay all taxes on time etc.) Negative covenants describe limitations and restrictions on the borrowers activities (like taking on additional debt etc.) 3. Features of a bond – maturity, par value (pricing, premium and discount), coupon rate, currency etc. (Bloomberg) 4. Longer the maturity, the greater the price volatility resulting from a change in interest rates 5. Coupon rate structures – Zero coupon bonds, step-up notes (triggered in case of a
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Unformatted text preview: credit event) and floating rate securities (coupon formula with caps and floors) 1. Coupon rate = reference rate + quoted margin = 1m Libor + 100bps 6. Inverse floater: Coupon rate = 20% - 2 x 3-month Treasury bill rate 1. When will an investor prefer an inverse floater to a floater? 7. Accrued interest, full price or dirty price (with accrued interest) and clean price (without accrued Interest) 8. Provisions for paying off bonds – Bullet (non-callable) vs Amortizing vs Callable 9. Embedded options in a bond - call and put. Prepayment option. 10. Practice questions – 1, 2 & 3 11. End of chapter questions- 1, 2, 3, 7 & 10 12. Homework problems assigned and due next week...
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Chapter 1 - credit event and floating rate...

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