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CFA Level 1 - Fixed Income Exam Questions and Answers 2024( A+ GRADED 100% VERIFIED).
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CFA Level 1 - Fixed Income Exam Questions and Answers 2024( A+ GRADED 100% VERIFIED).
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CFA Level 1 - Fixed IncomeLoans - ANS private, non-tradable agreements between a borrower and lender
Bonds - ANS standardized, tradable securities representing a debt investment
Fixed income securities - ANS standardized, tradable securities representing a debt
investment, another word for bonds
Principal - ANS capital lent to the bond issuer, also known as par or face value
Par - ANS capital lent to the bond issuer, also known as principal or face value
Face value - ANS capital lent to the bond issuer, also known as principal or par
Coupon - ANS interest paid on a bond, usually stated as a annual percentage of par
Issuers - ANS Sovereign national governments, local governments, corporations, supranational
entities, quasi government entities, and special purpose entities are examples of these.
Supranational entities - ANS Organizations that operate globally such as the World Bank, the
European Investment Bank, and the International Monetary Fund (IMF).
Quasi-government entities - ANS Not a direct obligation of a country's government or central
bank but sponsored by them. An example is the Federal National Mortgage Association (Fannie
Mae) or the railroads
Special-purpose entities - ANS Corporations set up to purchase financial assets and issue
asset-backed securities
Asset-backed securities - ANS Bonds backed by the cash flows of certain assets, usually
issued through special purpose entities
Maturity - ANS The date on which the final cash flow of a bond is paid. Usually this is when par
value is repaid, but some instruments require par be paid back over the life of the bond, like with
a mortgage loan
Tenor - ANS The time remaining until maturity
,Money market securities - ANS Bonds with original maturities of less than one year
Capital market securities - ANS Bonds with original maturities of more than one year
Perpetual bonds - ANS Bonds with no stated maturity date.
FRNS - ANS Bonds that pay coupons based on a variable market rate of interest.
Zero coupon bond/pure discount bond - ANS A bond that makes no coupon payments before
maturity and is therefore sold at a deep discount to par. Protect against reinvestment risk
Pure discount bond - ANS Another name for a zero coupon bond
Contingency provisions - ANS An action that may be taken if a particular event occurs.
Referred to as an embedded option in a bond indenture
Yield - ANS the annual rate of return on a bond if the bond were held to maturity. Has an
inverse relationship to price
Yield curve - ANS graphical representation of yield vs maturity.
Normal yield curve - ANS Upward sloping yield curve
Inverted yield curve - ANS Indicates that short-term interest rates are generally higher than
long-term interest rates.
Bond indenture - ANS legal contract between the issuer and the bondholders
Secured bond - ANS A bond repaid from the operating cash flow of a company with an added
legal claim on specific assets in the event of default
Lien/pledge - ANS a legal claim usually involved in collateralization
Collateral - ANS assets pledged as security for a loan
Unsecured bond - ANS A bond repaid by the operating cash flow of the issuing company
ABS (asset backed security) - ANS A debt instrument repaid by the cash flows of a particular
asset that is held by a special purpose entity
Covenants - ANS Legal rules written into the bond indenture, can be affirmative or negative
Affirmative covenants - ANS Covenants that require a borrower to perform certain actions
, Negative covenants - ANS Covenants that place restrictions on the issuer
Negative pledge clause - ANS A negative covenant that restricts the issuance of debt more
senior than the existing debt
Cross-default - ANS An affirmative covenant that states that if the issuer defaults on any other
debt obligation, they are also considered to have defaulted on this bond
Pari-passu - ANS An affirmative covenant that states that the bond has the same priority of
claims as the other debt the company issues
Incurrence test - ANS A test of financial ratios to determine if a company can issue dividends,
repurchases or additional borrowings
Bullet structure - ANS The structure of a typical bond where principal is paid back in a single
payment at maturity and coupons are purely interest payments
Amortizing loan - ANS A loan structure where periodic payments include both interest and
some repayment of the principal value
Fully Amortizing loan - ANS A bond in which the principal is fully paid off when the last periodic
payment is made (aka principal payoff has been fully included in periodic payments)
Balloon payment - ANS In a partially amortizing loan the repayment of remaining principal
sinking fund provisions - ANS When bonds require that certain portions of principal are repaid
throughout the bond's life, which decreases credit risk but increases reinvestment risk
waterfall structures - ANS A bond structure in which debt is split into tranches of seniority
Reinvestment risk - ANS The possibility of receiving cash flows early and only being able to
reinvest them at lower yields
credit spread - ANS The fixed margin paid on top of the MRR
step-up coupon bonds - ANS Bonds structured so that the coupon rate increases over time
according to a predetermined schedule providing protection against interest rate risk.
leveraged loans - ANS Loans to borrowers of lower credit quality; often have a coupon that
increases if issuer credit quality decreases.
credit-linked note - ANS A note where the coupon rate increases if the credit rating of the issuer
deteriorates (or vice versa)
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