6 Fixed Income

2022年CFA一级Fixed income，内容全面，让你不再需要看原版书，高效备考

Fixed Income

• Fixed-Income Securities: Defining Elements
  • Basic features of a fixed-income security
    • Definition: a contractual agreement between the issuer and the bondholders
    • Features
      • Issuer
        • Supranational entities
        • Sovereign national governments
        • Non-sovereign governments: not national governments
        • Quasi-government entities
        • Corporations
      • Bondholder
      • Maturity
        • Maturity date: the date on which the principal is to be repaid.
        • Term to maturity (tenor): the time remaining until the bond's maturity date
        • 按期限长度分类
          • Money market securities: one year or less
          • Capital market securities: more than one year
          • Perpetual bonds: no maturity date
      • Par Value: the principal amount that will be repaid at maturity
      • Coupon rate and frequency
        • Coupon rate: annual percentage of its par value that will be paid to bondholders
          • Plain vanilla bond (conventional bond): Bond with fixed coupon rate
          • Zero-coupon bonds (pure discount bonds): Bond pay no interest prior to maturity(implied basis)
        • Frequency: coupon interest payments may happen annually, semiannual, quarterly, or monthly
      • Currencies
        • Dual-currency bond: coupon interest payments in one currency and the principal repayment at maturity in another currency
        • Currency option bond: bondholders a choice of which of two currencies they would like to receive their payments in
    • Bond Market
      • Domestic bonds: Bonds issued by a firm domiciled in a country and also traded in that country's currency
      • Foreign bonds: Bonds issued by a firm incorporated in a foreign country that trade on the national bond market of another country in that country's currency
      • Eurobonds: are issued outside the jurisdiction of any one country and denominated in a currency different from the currency of the countries in which they are sold
        • Bearer bonds(Euro)
        • Registered bonds
      • Global bonds: Eurobonds that trade in the national bond market of a country other than the country that issues the currency the bond is denominated in, and in the Eurobond market
  • Bond indenture
    • Definition: the legal contract between the bond issuer (borrower) and bondholders (lenders) is called a trust deed, and in the United States and Canada, it is also called the bond indenture
    • The legal identity of the bond issuer and its legal form
      • Bondholders must be aware of which entity has actually promised to make the interest and principal payments
      • Special purpose entities (SPEs) or special purpose vehicles (SPVs): entities are created solely for the purpose of owning specific assets and issuing bonds to provide the funds to purchase the assets
    • Sources of Repayment
      • Sovereign bonds
        • Tax receipts of the issuing country
        • Print Money
      • Bond issued by Non-sovereign government
        • General taxes
        • Special taxes or fees dedicated to bond repayment
        • Revenues of a specific project
      • Corporate bonds: Firm's operations
      • Securitized bonds: Cash Flow of the financial assets owned by the SPE
    • Collateral Backing
      • Backed by collateral
        • Unsecured bonds: a claim to the overall assets and cash flows of the issuer
        • Secured bonds: backed by a claim to specific assets of a corporation, reducing their risk of default and the yield that investors require on the bonds
      • Classify by the type of collateral
        • Equipment trust certificates: are debt securities backed by equipment such as railroad cars and oil drilling rigs
        • Collateral trust bonds: are backed by financial assets, such as stocks and (other) bonds
        • Mortgage-backed security (MBS): The underlying assets are a pool of mortgages, and the interest and principal payments from the mortgages are used to pay the interest and principal on the MBS
        • Covered bonds: the underlying assets (the cover pool), remain on the balance sheet of the issuing corporation (i.e., no SPE is created), protecting bond holders when the assets serving as collateral are non-performing
    • Credit enhancement
      • Internal (built into the structure of a bond issue)
        • Overcollateralization: the collateral pledged has a value greater than the par value of the debt issued
        • Cash reserve fund: cash set aside to make up for credit losses on the underlying assets
        • Excess spread account: the yield promised on the bonds issued is less than the promised yield on the assets supporting the ABS
        • Tranches: divide a bond issue into tranches with different seniority of claims. available funds first go to the most senior tranche of bonds(least return), then to the next-highest priority bonds, and so forth
      • External (provided by a third party)
        • Surety bonds: issued by insurance companies and are a promise to make up any shortfall in the cash available to service the debt
        • Bank guarantees: as surety bonds, bank guarantees serve the same function
        • Letters of credit from financial institutions:. A letter of credit is a promise to lend money to the issuing entity if it does not have enough cash to make the promised payments on the covered debt
    • Covenants
      • Affirmative(require)
      • Negative(prohibit; restrict; limit; max; min; more costly)
    • Taxation of Bond Income
      • Interest income: taxed as ordinary income at the same rate as wage and salary income
        • Exception: municipal governments in the United States
      • Capital gain: happens when bondholder sells a coupon bond prior to maturity, which may be at a gain or a loss. Taxed at a lower rate
      • Original issue discount (OID) bonds: Because the gains over an OID bond's tenor as the price moves towards par value are really interest income, these bonds can generate a tax liability even when no cash interest payment has been made (par value-discount)/the number of years)
  • Structure of a fixed-income security
    • Principal Repayment Structures
      • Bullet Bond: plain vanilla bond, the entire payment of principal occurs at maturity
      • Amortized Bonds:
        • Fully Amortized Bonds: the principal is fully paid off when the last periodic payment is made
        • Partially Amortized Bonds: there is a balloon payment at bond maturity and the final payment includes just the remaining unamortized principal amount rather than the full principal amount
      • Sinking fund Provision: provide for the repayment of principal through a series of payments over the life of the issue
    • Coupon Payment Structures
      • Floating-Rate Notes
        • 特点: do not gave a fixed rate; may have a cap or floor
        • 计算: FRN's rate= reference rate + interest margin
        • Transforms of FRN
          • Variable-rate note: interest margin is not fixed
          • Inverse floater: reference rate rise, coupon rate decrease
      • Step-Up Coupon Bonds
        • The coupon rate increases over time according to a predetermined schedule
        • Have a call feature that allows the firm to redeem the bond issue at a set price at each step-up date
        • Yields could increase shrne an issuer's credit rating has fallen
      • Credit-Linked Coupon Bonds
        • Coupon rate changes inversely as the bond's credit rate goes down
        • THe higher required coupon payments may make the financial situation of the iffuer worse and possibly increase the probability of default
      • Payment-in-Kind Coupon Bonds
        • Allows the issuer to make the coupon payments in the form of additional amounts of the bond issue rather than as a cash payment
        • 原因: firm cash flows may be less than required to service the debt (high levels of debt financing (leverage))
        • 特点: have higher yields because of a lower perceived credit quality or simply because of the high leverage of the issuing firm
      • Deferred Coupon Bonds (split coupon bond)
        • 定义: regular coupon payments do not begin until a period of time after issuance
        • 使用时间: a firm financing a large project that will not be completed and generating revenue for some period of time after bond issuance
        • 实例: zero-coupon bonds
      • Index-Linked Bonds(以Inflation-linked bonds为例)
        • Zero-coupon-indexed bonds: pay no coupon, the payment at maturity is adjusted for inflation
        • Interest-indexed bonds: pay an index-linked coupon rate, but the nominal principal amount at maturity is fixed
        • Capital-indexed bonds: pay a fixed coupon rate, but the principal amount is increased by the rate of inflation
        • Indexed-annuity bonds: Fully amortizing bonds with the periodic payments directly adjusted for inflation index
  • Bonds with contingency provisions
    • Contingency provision: an action that may be taken if an event (the contingency) actually occurs. Contingency provisions in bond indentures are referred to as embedded options
      • Bonds that do not have contingency provisions are referred to as straight or option-free bonds
    • Types of Bonds with embedded options
      • Callable bonds
        • Option: Gives the issuer the right to redeem all or part of a bond issue at a specific price (call price) if they choose to, which has value to the issuer
        • Bond buyers are disadvantaged and have more reinvestment risk so a callable bond must offer a higher yield (sell at a lower price) than an identical noncallable bond
        • Redemption situations
          • Interest rates in general have decreased
          • Credit quality of the bond has increased (default risk has decreased)
        • Three styles of exercise
          • American style—the bonds can be called anytime after the first call date
          • European style—the bonds can only be called on the call date specified
          • Bermuda style—the bonds can be called on specified dates after the first call date, often on coupon payment dates
        • 特殊情况: Make-whole call provisions
          • 目标: To avoid the higher interest rates required on callable bonds but still preserve the option to redeem bonds early when corporate or operating events require it
          • 特点
            • The call price is not fixed but includes a lump-sum payment based on the present value of the future coupons the bondholder will not receive if the bond is called early
            • Not put an upper limit on bond values when interest rates fall as does a regular call provision
      • Putable bonds
        • Options: gives the bondholder the right to sell the bond back to the issuing company at a prespecified price and has value to the bondholder, so it will sell at a higher price (offer a lower yield)
        • Exercise situation
          • The fair value of the bond is less than the put price
          • The credit quality of the issuer has fallen
      • Convertible bonds
        • Option: give bondholders the option to exchange the bond for a specific number of shares of the issuing corporation's common stock
        • Valuable to
          • Bondholder: This gives bondholders the opportunity to profit from increases in the value of the common shares
          • Issuer
            • Lower yield (reduced interest expense)
            • The elimination of debt
        • Some terms
          • Conversion price: The price per share at which the bond (at its par value) may be converted to common stock
          • Conversion ratio: par value of the bond / the conversion price
          • Conversion value: conversion price*conversion ratio
          • Conversion premium: bond price - conversion value
      • Warrants
        • Option: give their holders the right to buy the firm's common shares at a given price over a given period of time
        • Exercise situation: For a young firm, which issues debt can be difficult
        • 优点: make the debt more attractive to investors because it adds potential upside profits if the common shares increase in value
      • Contingent Convertible bonds(CoCos)
        • 定义: Can convert from debt to common equity automatically if a specific event occurs
        • 发行主体(some European banks.)与原因
          • Banks must maintain specific levels of equity financing
          • CoCos are often structured so that if the bank's equity capital falls below a given level, they are automatically converted to common stock, decreasing the bank's debt liabilities and increasing its equity capital at the same time, which helps the bank to meet its minimum equity requirement
• Fixed-Income Markets: Issuance, Trading, and Funding
  • Overview of Global Fixed-Income Markets
    • Classification of Fixed-Income Markets
      • Type of issuer
        • Government and government related bonds
        • Corporate bonds
          • Financial corporations
          • Nonfinancial corporations
          • Structured finance (securitized bonds)
        • The largest issuers by total value of bonds outstanding in global markets are financial corporations and governments
      • Credit quality(Standard & Poor's (S&P), Moody's, and Fitch)
        • Investment grade
          • For S&P and Fitch: AAA, AA, A, and BBB
          • Moody's: Aaa through Baa3
        • High-yield, speculative, or "junk" bonds
          • For S&P and Fitch: BB+ or lower
          • Moody's: Ba1 or lower
      • Original maturities
        • Money market securities: one year or less
        • Capital market securities: Greater than one year
      • Coupon structure
        • Floating-rate: reference rate(变化) + spread(固定)
          • Reference rate (LIBOR)
            • Published daily for several currencies and for maturities of one day (overnight rates) to one year
            • An average is calculated from a survey of 18 banks' expected borrowing rates in the interbank market, after excluding the highest and lowest quotes
        • Fixed-rate
      • Currency denomination
      • Geography
        • Domestic (or national) bond markets, foreign bonds, and Eurobonds
        • Developed markets or emerging markets.
    • Fixed-income indexes
      • Barclays Capital Global Aggregate Bond Index: a broad-based measure of the global investment-grade fixed-rate bond market
      • J.P. Morgan Emerging Markets Bond Index (EMBI): used to describe the emerging market
      • FTSE Bond Index Series: provide coverage of different classes of securities related to the government and corporate bond markets.
    • Tax status
      • 原因: some issuers may issue bonds that are exempt from income taxes.
      • 实例: In the United States, these bonds can be issued by municipalities and are called municipal bonds, or munis.
      • 特点: Tax exempt bonds are sold with lower yields
  • Primary and Secondary Bond Markets
    • Primary Market
      • Public offering
        • Underwritten offering: the entire bond issue is purchased from the issuing firm by the investment bank (underwriter
          • Syndicate offering
          • Grey market: trading prior to the offering date of the bonds provides additional information about the demand for and market clearing price (yield) for the new bond issue
        • Best efforts offering: the investment banks sell the bonds on a commission basis and do not commit to purchase the whole issue
        • Shelf registration: a bond issue is registered with securities regulators in its aggregate value with a master prospectus, then can be issued over time
        • Auctions: especially government bonds
      • Private placement: sold only to a qualified investor or a small group of investors(e.g. large institutional investors)
    • Secondary Market
      • 分类
        • Traded on exchange
        • Over the counter market(OTC)
          • The great majority of bond trading in the secondary market is made in
          • Dealers post bid (purchase) prices and ask or offer (selling) prices for various bond issues
      • Trade settlement (Bond trades are cleared through a clearing system)
        • Government bonds: T+0 or the T+1
        • Corporate bonds: usually T+2 or T+3; or longer in some markets; on a book-entry basis
      • A liquid secondary market allows an investor to sell a bond at a price close to its fair value
  • Sovereign Bonds
    • Issuer: National governments or their treasuries
    • Characteristics: on-the-run bonds (also as benchmark)-- the most recently issued bonds is most active and prices most informative
    • Credit quality
      • Issued in local currency carry high credit ratings and are considered to be essentially free of default risk
      • Ability to collect taxes and ability to print the currency support these high credit ratings
      • Sovereign bonds also issued in foreign currencies
    • Types
      • Fixed-rate bonds
      • Floating-rate bonds
      • Inflation-indexed bonds
  • Non-Sovereign Government, Quasi-Government, and Supranational Bonds
    • Non-Sovereign bonds
      • Issuers: issued by states, provinces, counties and sometimes by entities created to fund and provide services
      • Credit quality
        • Typically of high credit quality, but sovereign bonds typically trade with lower yields (higher prices)
        • Payments on the bonds may be supported by the revenues of a specific project, from general tax revenues, or from special taxes or fees dedicated to the repayment of project debt
    • Agency or quasi-government
      • Issuers: entities created by national governments for specific purposes
      • Credit quality
        • Some quasi-government bonds are backed by the national government, which gives them high credit quality
        • Even those not backed by the national government typically have high credit quality although their yields are marginally higher than those of sovereign bonds
    • Supranational bonds
      • Issuers: supranational agencies, also known as multilateral agencies(e.g. ,the World Bank
      • Credit quality: typically have high credit quality and can be very liquid, especially large issues of well-known entities
  • Corporate Debt
    • Bank Debt
      • 特点
        • Typically LIBOR-based, variable-rate loans
        • There is a secondary market in syndicated loan interests that are also securitized, creating bonds that are sold to investors
      • 类型
        • Bilateral loan: the loan involves only one bank.
        • Syndicated loan: a loan is funded by several banks and the group of banks is the syndicate
    • Commercial Paper
      • 特点: short-term debt, unsecured debt instrument
      • Some terms
        • Bridge financing: Firms use commercial paper to fund working capital and as a temporary source of funds
        • Rollover-risk: The risk that a company will not be able to sell new commercial paper to replace maturing paper
        • Rollover difficulties
          • Deterioration in a company's actual or perceived ability to repay the debt at maturity
          • Significant systemic financial distress
        • Backup lines of credit/liquidity enhancement or backup liquidity lines: The bank agrees to provide the funds when the paper matures, if needed, except in the case of a material adverse change
    • Corporate Notes and Bonds
      • Corporate bonds
        • 特点
          • Issued with various coupon structures and with both fixed-rate and floating-rate coupon payments
          • May be secured by collateral or unsecured and may have call, put, or conversion provisions
        • 按时间分类
          • Short-term: up to 5 years
          • Medium-term: with maturities from 5 to 12 years
          • Long-term: maturities exceed 12 years
      • Medium-term notes (MTNs)
        • Maturities: range from nine months to periods as long as 100 years
        • Rate: MTNs fixed or floating-rate; but longer maturity MTNs are typically fixed-rate bonds
        • Issuer's agent: Investors make an offer to the issuer's agent, specifying the face value and an exact maturity within one of the ranges offered. The agent then confirms the issuer's
        • Issuers and buyers: Most MTNs, other than long-term MTNs, are issued by financial corporations and most buyers are financial institutions
  • Short-Term Funding Alternatives Available to Banks
    • Retail funds
      • Checking accounts(demand deposit): provide transactions services and immediate availability of funds but typically pay no interest
      • Savings accounts
      • Money market mutual funds: provide less liquidity or less transactions services, or both, and pay periodic interest
    • Wholesale funds
      • Central bank funds market
        • Maintain fund reserves: Banks in most countries must maintain a portion of their funds as reserves on deposit with the central bank
        • Lend fund: banks with excess reserves lend them to other banks for periods of one day (overnight funds) and for longer periods up to a year (term funds)
        • Central bank funds rates: refer to rates for these transactions, which are strongly influenced by the effect of the central bank's open market operations on the money supply and availability of short-term funds
      • Interbank funds
        • Loaned between banks for periods of one day to a year; unsecured
        • Liquidity may decrease severely during times of systemic financial distress
      • Large-demonination negotiable certificates of deposit
    • Repurchase (repo) agreement
      • 定义: an arrangement by which one party sells a security to a counterparty with a commitment to buy it back at a later date at a specified (higher) price
      • Repurchase price: accounts for the interest charged by the buyer, which is greater than the selling price
      • Interest rate: The interest rate implied by the two prices is called the repo rate, which is the annualized percentage difference between the two prices
        • Repo rate变化
          • Higher
            • Longer the repo term
            • The interest rates for alternative sources of funds are higher
          • Lower
            • Higher the credit quality of the collateral security
            • The collateral security is delivered to the lender
      • Repo margin (haircut)
        • 定义: The percentage difference between the market value and the amount loaned
        • 影响因素
          • Higher: the longer the repo term
          • Lower
            • Higher credit quality of the collateral security or the borrower
            • The collateral security is in high demand or low supply
• Introduction to Fixed-Income Valuation
  • Bond Pricing
    • Pricing with a single discount rate
      • Yield-to-maturity (YTM) or redemption yield: The market discount rate appropriate for discounting a bond's cash
        • Annually
        • Semi-annually
      • 一些关系
        • The relationship between price and YTM
          • Coupon rate < YTM: discount
          • Coupon rate = YTM: at par
          • Coupon rate > YTM: premium
        • The relationships between price and yield
          • At a point in time, a decrease (increase) in a bond's YTM will increase (decrease) its price, but the percentage decrease in value when the YTM increases by a given amount is smaller than the increase in value when the YTM decreases by the same amount (the price-yield relationship is convex)
          • Other things equal, the price of a bond is more sensitive to a change in yield
            • with a lower coupon rate
            • with a longer maturity
        • The relationship between price and maturity: the price will converge to par value as maturity approaches
    • Pricing with spot rates
      • Spot rates: The yield-to-maturity is calculated as if the discount rate for every bond cash flow is the same,and a sequence of market discount rates that correspond to the cash flow dates are called spot rates. Bond price calculated using spot rates, is sometimes called the no- arbitrage price of a bond
      • 公式
    • Flat price, Accrued interest and Full price
      • Terms
        • Flat price: also called the quoted or clean price
        • Accrued interest(Al)
        • Full price: also called dirty price
      • Relationship: When a bond is between coupon payment dates, Full price = Flat price + Accrued interest
      • Accured interest
        • 计算:AI=t/T*PMT
        • The 30/360 day-count convention often is used on corporate bonds
        • The actual/actual is most common for government bonds
      • Full price
    • Matrix pricing
      • 使用条件: estimating the required yield-to-maturity (or price) of bonds that are currently not traded or infrequently traded
      • 方法: Linear interpolation
        • Use the YTMs of traded bonds that have credit quality very close to that of a nontraded or infrequently traded bond and are similar in maturity and coupon
        • Use risk-free bonds (usually treasury bonds) that are similar in maturity, then add risk premium to get YTM
  • Yield Measures
    • Yield measures for fixed-rate bonds
      • Annual percentage rate(APR)
      • Street convention yield: Bond yields calculated using the stated coupon payment dates are referred to as following the street convention
      • True yield: Because some coupon dates will fall on weekends and holidays, coupon payments will actually be made the next business day. The yield calculated using these actual coupon payment dates is referred to as the true yield, which will be slightly lower than street convention yields for some coupon payments will be made later when holidays and weekends
      • Current yield=annual cash coupon payment / bond price
      • Simple yield: takes a discount or premium into account by assuming that any discount or premium declines evenly over the remaining years to maturity
      • Yield-to-call: The yield-to-call can be calculated for each possible call date and price. Calculation method is the same as YTM calculation
        • Yield-to-worst: The lowest of yield-to-maturity and the various yields-to-call
      • Option-adjusted yield
        • Calculated by adding the value of the call option to the bond's flat price
        • because callable bonds have higher yields to compensate bondholders for the issuer's call option
      • 影响因素
        • Benchmark
          • real risk-free rate
          • inflation
        • Spread
          • tax
          • liquidity
          • credit risk
    • Yield measures for floating-rate notes
      • Coupon rate on a floating-rate note: coupon rate = reference rate +/-quoted margin
      • Discount rate on a floating-rate note: coupon rate = reference rate+/-required margin
      • Quoted margin and required margin (also called discount margin)
        • Quoted margin = required margin, FRN sell at par(the credit quality is unchanged)
        • Quoted margin < required margin, FRN sell at discount(the credit quality is decreases)
        • Quoted margin > required margin, FRN sell at premium(the credit quality has improved)
    • Yield measures for money-market instruments
      • Discount rates(DR)
      • Add-on rates(AOR)
      • Differences in yield measures between the money market and the bond market
  • Yield Curve
    • Spot Curve (also called zero or strip curve): for single payments to be made in the future
    • Coupon bonds yield curve
      • shows the YTMs for coupon bonds at various maturities
      • Yields are calculated for several maturities and yields for bonds with maturities between these are estimated by linear interpolation
    • Par bond yield curve (or par curve): not calculated from yields on actual bonds but is constructed from the spot curve, which can be viewed as the YTM of a par bond at each maturity
    • Forward rates and spot rates
      • Forward rates notation: 1y1y is the rate for a 1-year loan one year from now 2y1y is the rate for a 1-year loan to be made two years from now; 3y2y is the 2-year forward rate three years from now; and so on
      • Relationship
        • 原理: borrowing for three years at the 3-year spot rate, or borrowing for one-year periods in three successive years, should have the same cost
        • 公式
          • Valuing a Bond Using Forward Rates
  • Yield Spreads
    • Benchmark spread
      • Definition: A yield spread relative to a benchmark
      • G-spread: A yield spread over a government bond
      • Interpolated spreads or l-spreads: A yield spread over interest rate swaps in the same currency and with the same tenor as a bond
    • Zero-volatility spread (Z-spread)
      • 定义: when the spread added to the benchmark spot curve, produces a value equal to the market price of the bond, the spread is called zero-volatility spread or Z-spread
      • 计算
    • Option-adjusted spread (OAS)
      • The OAS is the spread to the government spot rate curve that the bond would have if it were option-free, which is used for bonds with embedded options
      • option value = Z-spread - OAS
• Introduction to Asset-Backed Securities
  • 绪论
    • Securitization definition: Securitization refers to a process by which financial assets (e.g., mortgages, accounts receivable, or automobile loans) are purchased by an entity that then issues securities supported by the cash flows from those financial assets
    • Benefits
      • Benefits for banks
        • A reduction in funding costs for firms selling the financial assets to the securitizing entity
        • An increase in the liquidity of the underlying financial assets
      • For financial markets
        • Reduces intermediation costs, which results in lower funding costs for borrowers and higher risk-adjusted returns for lenders (investors)
        • Stronger legal claim to the mortgages or other loans
        • Increases the liquidity of the bank's assets
        • Fund speed up
        • Better match inverstors' preferred risk, maturity, and return
        • Provides diversification and risk reduction
  • Describe securitization
    • Parties involved and the roles they play
      • • The seller originates the auto loans and sells the portfolio of loans to the SPE • The issuer/trust is the SPE that buys the loans from the seller and issues ABS to investors • The servicer services the loans • In this case, the seller and the servicer are the same entity, but that is not always the case
    • Typical structure: credit structure and time structure
      • Credit structure
        • Single class: the cash flows to the securities are the same for all security holders
        • Multiple classes: each with a different claim to the cash flows of the underlying assets. The different classes are often referred to as tranches
      • Time structure
        • The first (sequential) tranche receives all principal repayments from the underlying assets up to the principal value of the tranche
        • The second tranche would then receive all principal repayments from the underlying assets until the principal value of this tranche is paid off
  • Residential mortgage-backed securities
    • Definition: a loan for which the collateral that underlies the loan is residential real estate. If the borrower defaults on the loan, the lender has a legal claim to the collateral property
    • Key Characteristics
      • Loan-to-value ratio (LTV): the percentage of the value of the collateral real estate that is loaned to the borrower
      • Maturity: the term of a mortgage loan is the time until the final loan payment is made
      • Interest Rate
        • Fixed-rate mortgage: interest rate that is unchanged over the life of the mortgage
        • Adjustable-rate mortgage (ARM), also called a variable-rate mortgage, has an interest rate that can change over the life of the mortgage
          • Hybrid mortgage: first fixed-rate, then adjusted-rate
          • Rollover or renegotiable mortgage: first fixed-rate, then another fixed-rate
          • Convertible mortgage: first fixed or adjustable, can be changed at the option of the borrower, to adjustable or fixed
        • Index-referenced mortgage: has an interest rate that changes based on a market determined reference rate such as LIBOR or the one-year U.S. Treasury bill rate
      • Amortization of principal
        • Fully amortizing loan: each payment includes both an interest payment and a repayment of some of the loan principal so there is no loan principal remaining after the last regular mortgage payment
        • Partially amortizing loan: loan payments include some repayment of principal, but there is a lump sum of principal that remains to be paid at the end of the loan period which is called a balloon payment
        • Interest-only mortgage: no principal repayment for either an initial period or the life of the loan
          • Interest-only lifetime mortgage: no principal is paid for the life of the loan it is an and the balloon payment is the original loan principal amount
          • Other interest-only mortgages: payments are interest-only over some initial period, with partial or full amortization of principal after that
      • Prepayment Provisions
        • Definition: A partial or full repayment of principal in excess of the scheduled principal repayments required by the mortgage
        • Reasons: Sell home or refinance
        • Some loans have no penalty for prepayment of principal while others have, which benefits the lender
      • Foreclosure
        • Nonrecourse loans: the lender has no claim against the assets of the borrower except for the collateral property itself, and borrowers sometimes voluntarily return the property to the lender when in home values fall, whidh is called a strategic default
        • Recourse loans: the lender has a claim against the borrower for the amount by which the sale of a repossessed collateral property falls short of the principal outstanding on the loan
    • Agency RMBS and nonagency RMBS
      • Nonagency RMBS
        • 定义: RMBS not issued by GNMA, Fannie Mae, or Freddie Mac
        • 特点
          • Not guaranteed by the government; credit risk
          • The credit quality of a nonagency MBS depends on the credit quality of the borrowers as well as the characteristics of the loans, such as their LTV ratios
        • Credit enhancement
          • Senior/subordinated structure: credit tranching (subordination)
          • Shifting interest mechanism: address a decrease in the level of credit protection provided by junior tranches as prepayments or defaults occur in a senior/subordinated structure
      • Agency RMBS
        • Issued and guaranteed by
        • Mortgage Pass-through securities
          • 定义: Each mortgage pass-through security represents a claim on the cash flows from a pool of mortgages
          • Securitized mortgage: any mortgage included in the pool
          • Weighted average maturity (WAM) of the pool: equal to the weighted average of the final maturities of each mortgage's outstanding principal balance as a proportion of the total outstanding principal value of all the mortgages in the pool
          • Weighted average coupon (WAC) of the pool: the weighted average of the interest rates of all the mortgages in the pool
          • Conforming loans: Loans that meet the standards for inclusion in agency MBS, and the standards include
            • Minimum percentage down payment
            • Maximum LTV ratio
            • Maximum size
            • Minimum documentation required
            • Insurance purchased by the borrower
            • Loans do not meet the standards are called nonconforming loans, which can be securitized by private companies for nonagency RMBS
          • Pass-through rates (also called netinterestor net coupon) = mortgage rate on the underlying - servicing and guarantee/insurance fees
          • Prepayment Risk
            • 原因: the mortgage loans used as collateral for agency MBS have no prepayment penalty
            • Risk types
              • Extension risk: the risk that prepayments will be slower than expected
              • Contraction risk: the risk that prepayments will be more rapid than expected
          • Prepayment Speed
            • Single monthly mortality rate (SMM): is the percentage by which prepayments reduce the month-end principal balance
            • Conditional prepayment rate (CPR) is an annualized measure of prepayments. (1-SMM)^12=1-CPR
            • Public Securities Association (PSA) prepayment benchmark assumes that the monthly prepayment rate for a mortgage pool increases as it ages (becomes seasoned). PSA benchmark is expressed as a monthly series of CPRs
              • PSA is 100:the prepayment rate (CPR)of an MBS is expected to be the same as the PSA standard benchmark CPR
              • PSA is 50: prepayments are 50% of the PSA benchmark CPR
              • PSA is 130: prepayments are 130% of the PSA benchmark CPR
        • Collateralized mortgage obligations(CMO)
          • 定义: securities that are collateralized by RMBS
          • 特点
            • Each CMO has multiple bond classes (CMO tranches) that have different claim against the cash flows of the mortgage pass-throughs and exposures to prepayment risk
            • Total risk is not changed: the prepayment risk is simply reapportioned among the various CMO tranches
            • Match investor preferences
            • Backed by MPS
          • CMO structures
            • Sequential Pay CMO
            • Planned Amortization Class (PAC) CMO
              • Has one or more planned amortization class (PAC) tranches and support tranches. A PAC tranche is structured to make predictable payments, regardless of actual prepayments to the underlying MBS
              • The PAC tranches have reduced both contraction risk and extension risk
              • The larger the support tranche(s) relative to the PAC tranches, the smaller the probability that the cash flows to the PAC tranches will differ from their scheduled payments
              • Initial PAC collar: The upper and lower bounds on the actual prepayment rates
                • Broken PAC: the prepayment rate is outside of these bounds
            • 比较
  • Commercial mortgage backed securities
    • Backed by income-producing real estate
    • Two key ratios are focused to assess credit risk
      • Debt-to-service-coverage(DSC)
        • 计算
        • 描述
          • The higher this ratio, the better; but typically between one and two
          • Ratios below one indicate that the borroweris not generating sufficient cash flow to make the debt payments and is likely to default
      • Loan-to-value ratio (LTV)
        • 计算
        • 描述: The lower this ratio, the better
    • Basic CMBS Structure
      • Each CMBS is segregated into tranches. Losses due to default are first absorbed by the tranche with the lowest priority. Sometimes this most junior tranche is not rated and is then referred to as the equity tranche, residual tranche, or first-loss tranche
      • call protection is valuable to the bondholder.In the case of MBS, call protection is equivalent to prepayment protection
        • Loan-level call protection provided by the terms of the individual mortgages
        • Call protection provided by the CMBS structure
    • Loan-level call protection(like corporate bond)
      • Prepayment lockout
      • Defeasance
      • Prepayment penalty points
      • Yield maintenance charges
  • Non-mortgage asset-backed securities
    • 定义: ABS that are backed by various types of financial assets including
      • Small business loans
      • Accounts receivable
      • Credit card receivables
      • Automobile loans
      • Home equity loans
      • Manufactured housing loans
    • 分类
      • Auto loan ABS
        • Cash flow
          • Interest payments
          • Scheduled principal payments
          • Prepayments
        • Credit enhancement
          • Senior-subordinated structure
          • Reserve account, an excess interest spread, or overcollateralization
      • Credit Card ABS
        • Cash flow
          • Finance charges
          • Annual fees
          • Principal repayments
        • Lockout period: During the time, no principal is paid to the ABS holders
        • The lockout period ends: principal payments are passed through to security holders
  • Collateralized debt obligations
    • Definition: A collateralized debt obligation (CDO) is a structured security issued by an SPE for which the collateral is a pool of debt obligations
    • Types
      • Collateralized bond obligations (CBO): the collateral securities are corporate and emerging market debt
      • Collateralized loan obligations (CLO): supported by a portfolio of leveraged bank loans
      • Structured finance CDOs: the collateral is ABS, RMBS, other CDOs, and CMBS
      • Synthetic CDOs: the collateral is a portfolio of credit default swaps on structured securities
    • CDOs Tranches
    • CDOs transaction
  • Covered bonds
    • 特点
      • Offer bondholders dual recourse, to both the issuing financial institution and the underlying asset pool.
      • Lower credit risk and lower yields
      • Dynamic cover pool
    • 分类
      • Hard-­bullet covered bonds: if payments do not occur according to the original schedule, a bond default is triggered and bond payments are accelerated
      • Soft-bullet co­vered bonds: delay the bond default and payment acceleration of bond cash flows until a new final maturity date, which is usually up to a year after the original maturity date
      • Conditional pass-­through covered bonds: convert to pass-­through securities after the original maturity date if all bond payments have not yet been made
• Understanding Fixed-Income Risk and Return
  • Sources of Return
    • Three sources of returns
      • Coupon and principal payments
      • Interest earned on coupon payments that are reinvested over the investor's holding period for the bond
      • Any capital gain or loss if the bond is sold prior to maturity( bond's sold price compared with carrying value)
    • The assumptions
      • A bond makes all of its promised coupon and principal payments on time (不考虑信用风险)
      • The interest rate earned on reinvested coupon payments is the same as the YTM on the bond.
    • Total return: future value of reinvested interest payments and the sale price (is par value if the bond holding until maturity)
    • Annualized holding period return: the compound annual return earned from the bond over the investor's holding period
    • Scenario analysis
      • Interest rate no change & hold to maturity
      • Interest rate no change & sold prior to maturity
      • Interest rate increase & hold to maturity
      • Interest rate increase & sold prior to maturity
      • Interest rate decrease & hold to maturity
      • Interest rate decrease & sold prior to maturity
  • Interest rate risk
    • 定义: the price sensitivity to interest rate changes
    • Two types of interest rate risk
      • Coupon reinvestment risk: uncertainty about reinvestment income
      • Market price risk: uncertainty about a bond price
    • Investment horizon:
      • Short investment horizon: market price risk > reinvestment risk
      • Long investment horizon: reinvestment risk > market price risk
    • Risk measured based on
      • Changes in a bond's own yield to maturity (yield duration and convexity)
      • Changes in a benchmark yield curve (curve duration and convexity)
    • Two commonly used measures of interest rate risk
      • Duration
        • Interpreting duration
          • Duration is the weighted average of time
          • Duration is used to measure interest rate risk. The higher duration, more interest rate risk
          • Duration is the slope of the price-yield curve at the bond's current YTM
        • Properties of Bond Duration
          • Coupon rate: Higher coupon rate, less interest rate risk and lower duration
          • YTM: Higher YTM, less interest rate risk and lower duration
          • Time to maturity: Longer maturity, more interest rate risk and higher duration
          • Bond with embedded options: Bond with embedded options, less interest rate risk and lower duration
        • 公式
        • 类型
          • Yield Duration
            • Macaulay Duration
            • Modified Duration
            • Approximate Modified Duration
              • V- is the price of the bond if YTM is price decreased by ΔYTM and V+ is the price of the bond if the YTM is increased by ΔYTM
              • V- > V+and because of the convexity of the price-yield relationship, the price increase (to V), for a given decrease in yield, is larger V.than the price decrease (to V+)
          • Curve Duration:
            • Effective Duration
              • 原因: the pricing of bonds with embedded put, call, or prepayment options begins with the benchmark yield curve, not simply the current YTM of the bond
              • 计算
              • 价格与收益率之间的关系
                • Callable bond: the convexity of a callable bond can be negative at low yields and positive at high yields
                • Putable bond: A putable bond has greater convexity than an otherwise identical option-free bond
              • 评价
                • Effective duration reflects only the sensitivity of the bond's value to changes in the benchmark yield curve
                • For bonds with embedded options, the future cash flows depend not only on future interest rates but also on the path that interest rates take over time
            • Key rate duration: is particularly useful for measuring the effect of a nonparallel shift (shaping risk) in the yield curve on a bond portfolio with different maturity range on the spot rate curve
          • 其他
            • Portfolio Duration
              • 计算: Portfolio duration = W1D1+ W2D2+.+WnDn
              • 评价: One limitation of this approach is that for portfolio duration to "make sense" the YTM of every bond in the portfolio must change by the same amount (i.e., a parallel shift in the yield curve)
            • Money duration: money duration = annual modified duration x full price of bond position
        • Price value of a basis point (PVBP)
          • 定义: the money change in the full price of a bond when its YTM changes by one basis point, or 0.01%
          • 计算
      • Convexity
        • Bond Convexity
          • 计算
        • Term structure of yield volatility
          • 定义: the relation between the volatility of bond yields and their times to maturity. From an investor's point of view, it's the volatility of a bond's price that is of concern
          • Two components of the volatility of a bond's price
            • The sensitivity of the bond's price to a given change in yield
            • The volatility of the bond's yield
  • HPR, Duration and investment horizon
    • Macaulay Duration v.s.Investment horizon
      • Macaulay Duration < Investment horizon: Market price risk < reinvestment risk
      • Macaulay Duration > Investment horizon: Marketprice risk > reinvestmentrisk
      • Macaulay Duration = Investment horizon: Marketprice risk = reinvestmentrisk
    • Duration Gap: Duration Gap = Macaulay Duration - Investment Horizon
    • 影响
      • Positive duration gap exposes the investor to market price risk from increasing interest rates
      • negative duration gap exposes the investor to reinvestment risk from decreasing interest rates
  • Credit and liquidity spread
    • Two components of a bond's spread to the benchmark curve
      • A premium for credit risk
      • A premium for lack of liquidity relative to the benchmark securities
    • 计算
• Fundamentals of Credit Analysis
  • Terms
    • Credit risk: the risk associated with losses stemming from the failure of a borrower to make timely and full payments of interest or principal. Credit risk has two components
      • Default risk: the probability that a borrower (bond issuer) fails to pay interest or repay principal when due.
      • Loss severity (loss given default) refers to the value a bond investor will lose if the issuer defaults, which can be stated as a monetary amount or as a percentage of a bond's value (principal and unpaid interest)
      • Expected Loss = default risk * loss severity
    • The recovery rate is the percentage ofa bond's value an investor will receive if the issuer defaults. recovery rate = 1-loss severity (%)
    • Yield spread: the difference in yield between a credit-risky bond and a credit-risk-free bond of similar maturity
      • Bond prices are inversely related to spreads
      • The size of the spread reflects the creditworthiness of the issuer and the liquidity of the market for its bonds
      • Factors influence yield spreads
        • 计算
          • option-free corporate bond yield = real risk-free interest rate + expected inflation rate + maturity premium +liquidity premium + credit spread
          • yield spread = liquidity premium + credit spread
        • 影响因素
          • Credit cycle
          • Economic conditions
          • Financial market performance
          • Broker-dealer capital
          • General market demand and supply
    • Credit migration risk or downgrade risk: the possibility that spreads will increase because the issuer has become less creditworthy
    • Market liquidity risk: the risk of receiving less than market value when selling a bond and is reflected in the size of the bid-ask spreads
  • Priority of claims
    • Secured Debt
      • First lien or first mortgage
      • Senior secured debt
      • Junior secured debt.
    • Unsecured Debt: Senior unsecured debt (the same rating as the issuer)
    • Subordinated debt
      • Senior subordinated debt
      • Subordinated debt
      • Junior subordinated debt
  • Credit Rating
    • 分类
      • Corporate family ratings (CFR): Issuer credit ratings
      • Corporate credit ratings (CCR): Issue specific ratings
    • Investment/ non-investment grade
    • Terms
      • Cross default provision: When a company defaults on one of its several outstanding bonds, provisions in bond indentures may trigger default on the remaining issues as well
      • Notching: rate agencies of assigning different ratings to bonds of the same issuer (e.g.,structural subordination)
    • Risks in relying on ratings from credit rating agencies
      • Credit ratings are dynamic
      • Rating agencies are not perfect
      • Event risk is difficult to assess
      • Credit ratings lag market pricing
  • Four Cs in credit analysis
    • Capacity
      • 定义: Capacity refers to a corporate borrower's ability repay its debt obligations on time
      • Three levels of assessment
        • Industry structure( Porter's five forces)
        • Industry fundamentals
          • Industry cyclicality: Cyclical industries are more risky than noncyclical industries
          • Industry growth prospects: Creditworthiness is most questionable for the weaker companies in a slow-growing or declining industry.
          • Industry published statistics
        • Company fundamentals
          • Competitive position: Market share changes over time and cost structure relative to peers
          • Operating history
          • Management’s strategy and execution
          • Ratios and ratio analysis
            • Profits and Cash Flows
              • Earnings before interest, taxes, depreciation, and amortization (EBITDA)
                • 计算: EBITDA = operating income + dep.& amor
                • 评价
                  • Commonly used measure
                  • Drawback:it does not adjust for capital expenditures and changes in working capital
              • Funds from operations (FFO): FFO = NI from continuing operations + dep.&amor.+deferred income taxes + other non-cash items
              • Free cash flow before dividends: FCF before div= Nl+dep.&amor.-capital expenditure- increase(decrease) in non-cash working capital- non-recurring items
              • Free cash flow after dividends: FCF after div.= FCF before div.-div.
            • Leverage Ratios
              • Debt/capital: A lower ratio indicates less credit risk capital = total debt + shareholders equity
              • Debt/EBITDA: A higher ratio indicates higher leverage and higher credit risk
              • FFO/debt: a higher ratio indicates lower credit risk
              • FCF after dividends/debt: Greater values indicate a greater ability to service existing debt
            • Coverage Ratios
              • EBITDA/interest expense: A higher ratio indicates lower credit risk. This ratio is used more often than the EBIT-to-interest expense ratio
              • EBIT/interest expense: A higher ratio indicates lower credit risk
    • Collateral
      • Intangible assets
      • Depreciation
      • Equity market capitalization
      • Human and intellectual capital
    • Covenants
      • Affirmative covenants
      • Negative covenants
    • Character
      • Soundness of strategy
      • Accounting policies and tax strategies
      • Fraud and malfeasance record
      • Prior treatment of bondholders
  • Evaluating the credit of high yield, sovereign, and non-sovereign government debt issuers and issues
    • High Yield Debt
      • Definitions: High yield or noninvestment grade corporate bonds are rated below Baa3/BBB by credit rating agencies. These bonds are also called junk bonds because of their higher perceived credit risk
      • Reasons for noninvestment grade ratings
        • High leverage
        • Unproven operating history
        • Low or negative free cash flow
        • High sensitivity to business cycles
        • Low confidence in management
        • Unclear competitive advantages
        • Large off-balance-sheet liabilities
        • Industry in decline
      • Special considerations for high yield bonds
        • Liquidity
          • Balance sheet cash
          • Working capital
          • Operating cash flow (CFO)
          • Bank credit
          • Equity issued
          • Sales of assets
        • Financial projections
        • Debt structure
        • Corporate structure
      • Covenants
        • Change of control put
        • Restricted payments
        • Limitations on liens
        • Restricted versus unrestricted subsidiaries
    • Sovereign Debt: A basic framework for evaluating and assigning a credit rating to sovereign debt includes five key areas
      • Institutional effectiveness
      • Economic
      • International investment position
      • Fiscal
      • Monetary flexibility
    • Non-Sovereign Government Bonds
      • General obligation (GO) bonds: unsecured bonds backed by the full faith credit of the issuing governmental entity; supported by its taxing power
      • Revenue bonds: issued to finance specific projects