When market interest rates i. Credit analysts calculate company ratios to assess the viability of a company, to find trends over time, and to compare companies to industry averages and peers. The weights for the calculation of portfolio duration under this approach are simply the full price of each bond as a proportion of the total portfolio value using full prices. Which of the following bond covenants is most accurately described as an affirmative covenant? Commercial paper is a short-term, unsecured debt instrument. This commercial paper most likely'. In calculating duration and convexity, we implicitly assumed that the yield curve shifted in a parallel manner. The following example illustrates this result.
A higher ratio indicates higher leverage and higher credit risk. One possible reason for this notching difference is that the bond may have a lower seniority ranking. At the same time, the covenants must not be so restrictive that they prevent the firm from taking advantage of opportunities that arise or responding appropriately to changing business circumstances. Excess supply conditions, such as large issuance in a short period of time, can lead to widening spreads. Because investors prefer bonds with lower probability of default, bonds with lower credit quality must offer investors higher yields to compensate for the greater probability of default.
Collateral Collateral analysis is more important for less creditworthy companies. Negotiable certificates of deposit can be sold. Economic factors to assess include employment, trends in per capita income and per capita debt, tax base dimensions depth, breadth and stability , demographics, and ability to attract new jobs location, infrastructure. Rating agencies may update their default risk assessments during the life of a bond. B Fixed-income sector classifications by type of issuer include government, corporate, and structured finance instruments. The majority of Eurobonds are issued in bearer form. A bond that is selling for more than its par value is said to be trading at a premium to par; a bond that is selling at less than its par value is said to be trading at a discount to par; and a bond that is selling for exactly its par value is said to be trading at par.
Issue credit ratings depend on the seniority of a bond issue and its covenants. Credit ratings adjust quickly to changes in bond prices. In steady-performing markets with low volatility of returns, credit spreads also tend to narrow as investors reach for yield. For the 5-year period from the issue date until June 2017, the bond is not callable. In some countries, bonds registered under a shelf registration can be sold only to qualified investors. Some quasi-government bonds are backed by the national government, which gives them high credit quality.
Loss severity as a percentage is equal to one minus the recovery rate. Since not much time is left for the examination , you would need to practice as many questions as you can to get the grip on the topic. The repo margin is influenced by similar factors. The claim of senior unsecured debt is below after that of secured debt but ahead of subordinated , or junior, debt. Her realized return will increase when interest earned on reinvested cash flows increases, and decrease when the reinvestment rate decreases.
There were not that many changes, just a few. A bond or portfolio will have a key rate duration for each maturity range on the spot rate curve. Bonds can then be issued over time when the issuer needs to raise funds. A An add-on yield based on a 365-day year is a bond-equivalent yield. Credit rating agencies assign each national government two ratings: 1 a local currency debt rating and 2 a foreign currency debt rating.
While this offers some protection against a credit downgrade of the issuer, the higher required coupon payments may make the financial situation of the issuer worse and possibly increase the probability of default. Supranational Bonds Supranational bonds are issued by supranational agencies, also known as multilateral agencies. B Tax authorities typically treat the increase in value of a pure-discount bond toward par as interest income to the bondholder. Such gains and losses are considered capital gains income rather than ordinary taxable income. A letter of credit from a bank.
Eurobonds are issued outside the jurisdiction of any single country and denominated in a currency other than that of the countries in which they trade. Some bonds, especially government bonds, are sold through an auction. External credit enhancements include surety bonds, bank guarantees, and letters of credit from financial institutions. Recall that spot rates are the appropriate yields, and therefore appropriate discount rates, for single payments to be made in the future. © Professor's Note: This is analogous to refinancing a home mortgage when mortgage rates fall in order to reduce the monthly payments. A credit analyst will need to calculate leverage for each level of the debt structure when an issuer has multiple layers of debt with a variety of expected recovery rates. Page 106 ©2014 Kaplan, Inc.
C Libor rates are determined in the market for interbank lending. Bonds with credit risk trade at higher yields than bonds thought to be free of credit risk. For a longer investment horizon, the increase in reinvestment income from the yield increase was greater than the decrease in the sale price of the bond. Page 44 ©2014 Kaplan, Inc. B The interest rate sensitivity of a bond with an embedded call option will be less than that of an option-free bond. Coupon interest and reinvestment income for two years: 60 1. Inconsistent reporting requirements for municipalities are also an issue.