>Barbara S. Petitt
Fixed Income Analysis Workbook
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FIXED INCOME ANALYSIS WORKBOOK
Third Edition
Barbara S. Petitt, CFA
Jerald E. Pinto, CFA
Wendy L. Pirie, CFA
with
Robin Grieves, CFA
Gregory M. Noronha, CFA
Cover image: © iStock.com / PPAMPicture
Cover design: Wiley
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The First and Second Editions were published by Wiley in 2000 and 2007.
Published simultaneously in Canada.
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ISBN 978-1-118-99950-9 (Paperback)
ISBN 978-1-119-02973-1 (ePDF)
ISBN 978-1-119-02977-9 (ePub)
PART I
LEARNING OBJECTIVES, SUMMARY OVERVIEW, AND PROBLEMS
CHAPTER 1
FIXED-INCOME SECURITIES: DEFINING ELEMENTS
LEARNING OUTCOMES
After completing this chapter, you will be able to do the following:
● describe the basic features of a fixed-income security;
● describe functions of a bond indenture;
● compare affirmative and negative covenants and identify examples of each;
● describe how legal, regulatory, and tax considerations affect the issuance and trading of fixed-income securities;
● describe how cash flows of fixed-income securities are structured;
● describe contingency provisions affecting the timing and/or nature of cash flows of fixed-income securities and identify whether such provisions benefit the borrower or the lender.
SUMMARY OVERVIEW
This chapter provides an introduction to the salient features of fixed-income securities while noting how these features vary among different types of securities. Important points include the following:
● The three important elements that an investor needs to know when investing in a fixed-income security are (1) the bond's features, which determine its scheduled cash flows and thus the bondholder's expected and actual return; (2) the legal, regulatory, and tax considerations that apply to the contractual agreement between the issuer and the bondholders; and (3) the contingency provisions that may affect the bond's scheduled cash flows.
● The basic features of a bond include the issuer, maturity, par value (or principal), coupon rate and frequency, and currency denomination.
● Issuers of bonds include supranational organizations, sovereign governments, non-sovereign governments, quasi-government entities, and corporate issuers.
● Bondholders are exposed to credit risk and may use bond credit ratings to assess the credit quality of a bond.
● A bond's principal is the amount the issuer agrees to pay the bondholder when the bond matures.
● The coupon rate is the interest rate that the issuer agrees to pay to the bondholder each year. The coupon rate can be a fixed rate or a floating rate. Bonds may offer annual, semi-annual, quarterly, or monthly coupon payments depending on the type of bond and where the bond is issued.
● Bonds can be issued in any currency. Bonds such as dual-currency bonds and currency option bonds are connected to two currencies.
● The yield to maturity is the discount rate that equates the present value of the bond's future cash flows until maturity to its price. Yield to maturity can be considered an estimate of the market's expectation for the bond's return.
● A plain vanilla bond
