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22 Learning Module 1 Fixed-Income Instrument Features SOLUTIONS 1. A is correct. te notes mature (the date Antelas AG will pay the snal coupon and principal amount) four years after the trade settlement date, and the coupon rate is variable, determined by the MRR plus a sxed 250 bp spread. 2. C is correct. Secured corporate bonds rely on the operating cash oows of the srm as their primary source for interest and principal payments and a legal claim on assets as a secondary source of payment. A is incorrect because asset-backed securities (ABS) are issued by special-purpose entities created to take ownership in loans or receivables, the cash oows from which are used to pay interest and principal to investors. B is incorrect because it describes unsecured, not secured, corporate debt. 3. C is correct. For the Antelas AG FRN, the spread is sxed at 250 bps and the cou- pon will only change with changes in the MRR. 4. B is correct. On the maturity date, Antelas AG pays investors the snal FRN cou- pon payment plus the bond’s principal amount. te FRN coupon comprises MRR plus the issuer-specisc spread. ■ FRN coupon rate: MRR plus spread, or 0.25% + 2.50%= 2.75% ■ Annual interest expense: Principal × FRN coupon, or €EUR250,000,000 × 2.75% = EUR6,875,000 ■ Quarterly interest expense: Annual interest expense/4, or EUR6,875,000/4 = EUR1,718,750 ■ Principal Amount: EUR250,000,000 ■ Total Payment = EUR250,000,000 + EUR1,718,750 = 251,718,750 5. A is correct. Antelas AG’s existing secured, unsubordinated debt has a pari passu (or “equal footing”) clause, which ensures that this debt obligation will be treated the same as any other secured, unsubordinated debt from this borrower. B is incorrect because the priority of payments is unrelated to the timing of issuance. C is incorrect because the pari passu clause ensures equal footing for similar new debt.
Solutions 53 SOLUTIONS 1. B is correct. Digistrype, a Canadian srm, is planning to issue and sell euro-denominated bonds to investors in Germany. Bonds issued by entities that are incorporated in another country are called foreign bonds. A is incorrect because Eurobonds are cross-border bonds that are not necessarily denominated in euros. C is incorrect because domestic bonds refer to a domestic issuer, not investor. 2. C is correct. Principal repayment acceleration, such as full amortization, partial principal amortization, or a sinking fund arrangement, is a way to reduce credit risk. Alternatively, Digistrype could incorporate debt coupon changes linked to snancial covenants and/or credit ratings in order to address investor concerns. A is incorrect because it would delay rather than accelerate repayment. B is incorrect because a call provision does not address credit concerns. 3. A is correct. A call provision gives Digistrype the right to redeem all or part of the bond prior to maturity if interest rates decline, so new debt could be issued at a lower cost. B is incorrect because a put provision grants investors, not issuers, the right to redeem debt prior to maturity but would not be exercised if interest rates fell, because a put provision is intended to limit investor’s downside, not upside. C is incorrect; a step-up coupon is not a contingency provision. 4. A is correct. te conversion value of a bond equals its par value if the current share price and conversion price are equal. Conversion ratio = Convertible bond par value/Conversion price. We know that Conversion value = Conversion ratio × Current share price. Or, after rearranging, Conversion ratio = Conversion value/Current share price, which can be substituted into the lefthand side of the srst equation: Conversion value/Current share price = Convertible bond par value/Conversion price. If Current share price = Conversion price, then Conversion value = Convertible bond par value. 5. A is correct. Because the conversion provision is valuable to bondholders, the convertible bond price is higher than the price of an otherwise similar bond without the conversion provision. Similarly, the yield on a convertible bond is lower than the yield on an otherwise similar non-convertible bond. tus, should the Digistrype team elect to remove the conversion feature, it would likely have to increase the bond’s coupon rate in order to attract investors. B is incorrect because removal of the conversion feature would decrease, not increase, the bond price. C is incorrect because removal of the conversion feature would not change the credit risk.

76 Learning Module 3 Fixed-Income Issuance and Trading SOLUTIONS 1. A. III B. I C. II 2. C is correct. Sovereign government issuers typically have the lowest credit risk (highest credit rating) in each market, due to sovereign governments’ right to tax economic activity. High-yield issuers have below-investment-grade credit ratings (BBB- or below), while distressed issuers typically have high-yield ratings or are in default. 3. C is correct. Mutual funds and ETFs that track this benchmark index orer comprehensive exposure to many sxed-income markets with no active security selection and portfolio turnover limited solely to either new issuance or issues no longer meeting inclusion criteria. 4. A is correct. Increasing the size of an existing bond with a price signiscantly direrent from par is referred to as the reopening of an existing bond. A private placement refers to bonds being sold to a selected investor or group of investors, versus a sale to the public. Bonds of issuers believed to be very close to or in bankruptcy are referred to as distressed. 5. B is correct. Bonds of less frequent corporate issuers or more seasoned bonds of frequent issuers are rarely traded, leading dealers to quote bid–orer spreads of at least 10–20 basis points or more for small sizes. te most recently issued, or on-the-run, developed market sovereign bonds are typically the most liquid sxed-income securities, with primary dealers making active markets in large size with bid–orer spreads equal to a fraction of a basis point. Among corporate issu- ers, recently issued corporate bonds from frequent issuers of higher credit quality usually exhibit the greatest liquidity and tightest bid–orer spreads.