Financial Analysis. Lesson 34. Debt Instruments and Structured Finance
Financial Analysis. Lesson 34. Debt Instruments and Structured Finance
Debt instruments are financial assets that require repayment with interest.
Corporate bonds are issued by companies to raise capital from investors.
Government bonds are debt securities issued by national or local governments.
Municipal bonds finance public projects and are issued by local governments.
Treasury bills (T-bills) are short-term government debt securities with maturity under a year.
Treasury notes (T-notes) are government bonds with maturities of two to ten years.
Treasury bonds (T-bonds) are long-term securities maturing in over ten years.
Mortgage-backed securities (MBS) are backed by a pool of mortgage loans.
Asset-backed securities (ABS) are supported by assets like auto loans or credit cards.
Collateralized debt obligations (CDOs) pool loans and split them into risk tranches.
Zero-coupon bond pays no interest but is sold at a discount.
Convertible bond can be converted into equity at a predetermined price.
Floating rate bond has interest rates that adjust with market rates.
Callable bond gives issuer the option to repay before maturity.
Putable bond allows bondholders to sell back to issuer before maturity.
Securitization transforms illiquid assets into tradable securities.
Credit enhancement reduces risk through insurance or guarantees on securities.
Structured finance designs complex financial products to manage unique risks.
Tranche divides a security into portions with varying risk and returns.
Collateral secures debt repayment by pledging assets as backup.
Credit rating assesses likelihood of issuer defaulting on debt.
Indenture is a formal contract between bond issuer and bondholders.
Debt covenants are terms that protect lenders by restricting borrower activities.
Senior debt has priority claim over other debts in liquidation.
Subordinated debt ranks below senior debt and has higher risk.
Mezzanine financing is a mix of debt and equity for high-risk funding.
Debt restructuring modifies terms to make debt repayment more manageable.
Commercial paper is a short-term, unsecured debt used by corporations.
Debenture is an unsecured bond relying solely on issuer’s credit.
Yield spread is the difference between yields of various debt securities.
Technical Examples:
Mortgage-backed securities (MBS) allow investors to gain from housing loan repayments.
Securitization converts assets like auto loans into marketable securities.
Credit enhancement provides added security, reducing investment risk in securities.