CFA Level 1 - Fixed Income 2024
Bond Indenture - Contract that specifies all the rights and obligations of the issuer
and owners of a fixed income security.
Negative Covenants - Prohibitions on the borrower.
Affirmative Covenants - Actions that the borrower promises to perform.
Maturity or Term to Maturity - Length of time until loan contract or agreement
expires. Remaining life of bond.
Par Value - Amount borrower promises to pay on or before maturity date.
Coupon Rate - Rate when multiplied by Par Value gives amount of annual interest
payment.
Zero-Coupon Bonds - Bonds that do not pay interest; Instead sold at a deep
discount from par values. Market convention states semi-annual compounding
used when pricing zeros.
,CFA Level 1 - Fixed Income 2024
Non-Amortizing Bond (Bullet Bond or Bullet Maturity) - Characteristic of most T-
Bonds and Corporate bonds. Pay only interest until maturity, at which time full
face value is paid back.
Bullet Bonds - Pay entire principal in one lump sum at maturity.
Serial Bonds - Pay off principal thru series of pmts over time.
Amortizing Securities - Make periodic principal and interest pmts (i.e., MBS &
ABS).
Sinking Fund Provisions - Provide for the retirement of a bond thru a series of
predefined principal pmts over the life of the issue.
Sinking-Fund Provisions - Cash Payment - issuer deposits cash with trustee who
retires applicable proportion of bonds at par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in
the market and delivers them to trustee who will retire them.
Investor options - Conversion features, put provisions, and floors.
,CFA Level 1 - Fixed Income 2024
Issuer options - Call provisions, prepayment options, sinking fund provisions, and
caps.
Callable Bond Provisions - Issuer has right (not obligation) to retire all or part of
bond prior to maturity. There may be several call dates, and customarily when a
bond is called on the first permissible call date, the call price is above par value.
The call price will normally decline over time according to the schedule.
Doubling Option - Like a Call Option.
Put Provision - Grants right to sell (put) the bond to the issuer at a specified price
prior to maturity.
When would it be beneficial for a bondholder to exercise a put option? - If interest
rates have risen and/or the creditworthiness of the issuer has deteriorated so that
the market price of the bond has fallen below par.
Non-Callable Bond - Absolute protection against call prior to maturity.
, CFA Level 1 - Fixed Income 2024
Refunding Provisions - Nonrefundable bonds prohibit premature retirement of
issue using proceeds of a lower cpn bd. Bds that carry these provisions can be
freely callable, but not refundable.
Non-Refundable Bond - Prohibit call of an issue using proceeds from a lower
coupon bond issue.
Conversion Option - Grants bondholder right to convert bond into a fixed number
of common shares. Options adds value to bond.
Exchange Option - Similar to conversion option, but allows conversion into a
security other than common stock.
Floating Rate Securities - Bonds that pay a variable rate of interest.
Coupon Formula (Floater) - Formula used to find new rate on a floating-rate
security
[New Coupon Rate = Reference Rate (+) or (-) Quoted Margin].
Deleveraged Floater - Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin.
Bond Indenture - Contract that specifies all the rights and obligations of the issuer
and owners of a fixed income security.
Negative Covenants - Prohibitions on the borrower.
Affirmative Covenants - Actions that the borrower promises to perform.
Maturity or Term to Maturity - Length of time until loan contract or agreement
expires. Remaining life of bond.
Par Value - Amount borrower promises to pay on or before maturity date.
Coupon Rate - Rate when multiplied by Par Value gives amount of annual interest
payment.
Zero-Coupon Bonds - Bonds that do not pay interest; Instead sold at a deep
discount from par values. Market convention states semi-annual compounding
used when pricing zeros.
,CFA Level 1 - Fixed Income 2024
Non-Amortizing Bond (Bullet Bond or Bullet Maturity) - Characteristic of most T-
Bonds and Corporate bonds. Pay only interest until maturity, at which time full
face value is paid back.
Bullet Bonds - Pay entire principal in one lump sum at maturity.
Serial Bonds - Pay off principal thru series of pmts over time.
Amortizing Securities - Make periodic principal and interest pmts (i.e., MBS &
ABS).
Sinking Fund Provisions - Provide for the retirement of a bond thru a series of
predefined principal pmts over the life of the issue.
Sinking-Fund Provisions - Cash Payment - issuer deposits cash with trustee who
retires applicable proportion of bonds at par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in
the market and delivers them to trustee who will retire them.
Investor options - Conversion features, put provisions, and floors.
,CFA Level 1 - Fixed Income 2024
Issuer options - Call provisions, prepayment options, sinking fund provisions, and
caps.
Callable Bond Provisions - Issuer has right (not obligation) to retire all or part of
bond prior to maturity. There may be several call dates, and customarily when a
bond is called on the first permissible call date, the call price is above par value.
The call price will normally decline over time according to the schedule.
Doubling Option - Like a Call Option.
Put Provision - Grants right to sell (put) the bond to the issuer at a specified price
prior to maturity.
When would it be beneficial for a bondholder to exercise a put option? - If interest
rates have risen and/or the creditworthiness of the issuer has deteriorated so that
the market price of the bond has fallen below par.
Non-Callable Bond - Absolute protection against call prior to maturity.
, CFA Level 1 - Fixed Income 2024
Refunding Provisions - Nonrefundable bonds prohibit premature retirement of
issue using proceeds of a lower cpn bd. Bds that carry these provisions can be
freely callable, but not refundable.
Non-Refundable Bond - Prohibit call of an issue using proceeds from a lower
coupon bond issue.
Conversion Option - Grants bondholder right to convert bond into a fixed number
of common shares. Options adds value to bond.
Exchange Option - Similar to conversion option, but allows conversion into a
security other than common stock.
Floating Rate Securities - Bonds that pay a variable rate of interest.
Coupon Formula (Floater) - Formula used to find new rate on a floating-rate
security
[New Coupon Rate = Reference Rate (+) or (-) Quoted Margin].
Deleveraged Floater - Scaling factor
New Coupon Rate = (b * Reference Rate) (+) or (-) Quoted Margin.
