导图社区 6 Fixed Income
- 34
- 0
- 1
- 举报
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
编辑于2022-06-13 10:02:00- 相似推荐
- 大纲
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