FIXED INCOME ANALYSIS

CLASS: MBA-1.5 (FINANCE & INVESTMENT)

SUBMITTED TO:
SIR SHOAIB HASHMI

SUBMITTED BY:

ABDUL QADIR KHAN

KARACHI UNIVERSITY BUSINESS SCHOOL

UNIVERSITY OF KARACHI
Problem 01 : What are Floating Rate Securities? Also describe Inverse /
reverse floaters?

Floating Rate Securities:-

Securities that have a variable coupon, equal to a money reference rate. Price of floating
rate bonds remains relatively stable because neither a capital gain nor a capital loss
occurs as market interest rates go up or down.

Inverse/Reverse floaters:-
The inverse floater is a derivative security synthetically created from the fixed rate debt
instrument as the underlying collateral. The many variations of inverse floaters are
known as reverse floater, bull floaters, yield curve notes, and maximum rate notes

Problem 02: Define and explain Bullet Maturity, Amortizing Securities,

Call Provision and its features?

Bullet Maturity:-
A bullet loan is a type of loan in which the principal that is borrowed is paid back at the
end of the loan term. In some cases, the interest expense is added to the principal
(accrued) and it is all paid back at the end of the loan. This type of loan provides
flexibility to the borrower but it is also risky. In a debt schedule, periodic expenses would
only consist of interest expense and no principal payment, as this is consolidated at
maturity.

Amortizing Securities:-
An amortizing security is a class of debt investment in which a portion of the underlying
principal amount is paid in addition to interest with each payment made to
the security's holder.

Call Provisions:-
A Call Provision is a provision or a clause or an embedded option in the bond that allows
the issuer to retire the bond early or before maturity. It is a provision in a bond’s
indenture that enables the issuer to call or redeem the full or part of the issue before the
maturity date. It is only an option for the issuer, not an obligation.
Problem no 03: What are embedded Options, Margin Borrowing and
Repurchase agreements. Explain briefly?

Embedded Options:-
An embedded option is a provision in a financial security (typically in bonds) that
provides an issuer or holder of the security a certain right but not an obligation to perform
some actions at some point in the future. The embedded options exist only as a
component of financial security such as a bond or stock and cannot be separated from it.
Although embedded options can be attached to any financial security, they are mostly
included in bonds.

Margin Financing:-
Margin Financing (MF) facility is made available to all Members against net ready
market purchases of their clients and proprietary positions. MF can be obtained as per
agreed Financier Participation Ratio (FPR). However, minimum of 25% or VAR
whichever is higher should be contributed by Finance. Financing terms and conditions
are pre-determined by Margin Finance and Margin Financier. All MF Transactions are
based on counterparty risk in a disclosed manner.

Repurchase Agreements:-

A repurchase agreement, also known as a repo loan, is an instrument for raising short-
term funds. With a repurchase agreement, financial institutions essentially sell securities
from someone else, usually a government, in an overnight transaction and agree to
buy them back at a higher price at later date. The security acts as collateral for the buyer
until the seller can pay the buyer back, and the buyer earns interest in return.