47 Fixed income instruments

Question 1

Loans

Answer 1

Private, nontradable agreements between a borrower and a lenders

Question 2

Bonds

Answer 2

Standardized, tradable securities in which investors lend capital to the issuer of the bond

Question 3

Major issuers of bonds

Answer 3

1) Corporations
2) Sovereign governments
3) Non-sovereign governments
4) Quasi-government entities
5) Supranational entities
6) Special purpose entities

Question 4

Basic features of bonds

Answer 4

1) Maturity date
2) Principal
3) Coupon rate
4) Seniority
5) Contingency provisions

Question 5

Bond indenture

Answer 5

Legal contract between issuer and bondholder

Question 6

Bond covenants

Answer 6

Specific requirements the issuer must fulfill within the bond indenture

Question 7

Affirmative covenants

Answer 7

1) Provide timely reports to bondholders
2) Bondholder’s right to redeem at par, or at a premium in a merger
3) Cross-default provision
4) Pari passu clause

Question 8

Cross-default provision

Answer 8

Any issuer defaults apply also to this bond

Question 9

Pari passu clause

Answer 9

Ensures the bond continues to have a senior claim

Question 10

Negative covenants

Answer 10

1) Entering into asset sales and leaseback agreements
2) Pledges of collateral
3) Negative pledge clause
4) Incurrence test

Question 11

Negative pledge clause

Answer 11

Issuance of more senior debt, ranking above existing debt

Question 12

Incurrence test

Answer 12

Additional borrowings, share repurchases, or dividends can only be carried out if financial ratios remain within a threshold