Fixed Income Fundamentals
Define duration and convexity?
Duration measures a bond’s price sensitivity to interest rate changes (linear). Convexity measures the rate of change of that duration (curved).
Give me 4 links between the 3 statements
NI to CFO/RE, CFS Change in Cash to BS Cash, Dividends on CFS to RE, D&A to PP&E, interest on IS calculated as % of debt on BS
If you are a buyer looking to acquire a public company, why do you look at EV rather than Equity Value for acquisition price?
Enterprise Value (EV) because it represents the total value of the core operating business available to all capital providers
Mission Statement?
Empowering Penn Staters to reach the highest levels of finance
Why do covenants exist?
Companies are required to act in shareholders' best interest- no similar requirement for lenders, so covenants represent protection
Interest rate - price - yield relationship?
Interest rates rise: price down, yield up
Walk me from NI to UFCF
NI to EBIT then formula
3 valuation ratios?
EV/EBITDA, EV/EBIT, EV/Revenue
Four Values?
Giving back, commitment to personal & professional development, honor & integrity, commitment to diversity & inclusion
4 types of subordination?
Temporal, lien, contractual, and structural subordination
Do investors prefer positively or negatively convex bonds?
Investors almost always prefer positive convexity: bond's price rises more when interest rates fall than it drops when interest rates rise (favorable risk profile)
What is the difference between an Expense on the IS and a Capital Expenditure (CapEx) on the Balance Sheet?
OpEx = short-term cost whose economic benefit is fully consumed within the current period, so it is deducted from IS at once. CapEx is a long-term investment that provides economic value across multiple years
How could a company with 5 years of strong positive EBITDA go bankrupt?
Capex, debt wall, interest payments, unusual expenses, asset write-downs
What are LLC's 8 sectors?
C&R, M&C, Materials, Energy, IT, Industrials, Healthcare, REGAL-FIG
Loans vs. bonds: which is more likely to have maintenance vs. incurrence covenants?
Loans = incurrence
Bonds = maintenance
What is a guarantor?
a third party—such as an individual, a parent company, or a subsidiary—that legally promises to step in and repay a debt if the primary borrower defaults
Walk me thru end of Year 1: $100 in debt, 25% interest, 5% amortization. 20% tax rate
balances at cash down 25, debt down 5, RE down 20
Can you name a scenario where Public Comps might actually be higher than Precedent Transactions?
Market bubble/extreme bull market
Why is LLC a paper portfolio?
Because unlike stocks, credit investments (esp. loans) have high investment floors (designed for institutional investors rather than individuals). Unrealistic to have billions of real dollars
Walk through the capital structure with an example for each tier?
Super senior - super secured - secured - sr unsecured - subordinated - hybrid/pref - equity
What's the line in credit ratings between IG and non-IG (Moody's or S&P)
BBB- or higher is IG, BB+ or lower is non-IG
A company buys $10,000 worth of raw inventory from a supplier, but they buy it on credit. On the day this transaction happens, what happens to Inventory, Accounts Payable, and Net Working Capital?
Inventory & AP: Increases by $10,000. Net Working Capital: There is no change ($0).
A publicly traded software company has 20,000 basic shares outstanding trading at a current market price of $50.00 per share. Total Debt: $300 million Cash: $150 million. NCI: $40 million. Calculate EV
$191 million
What two benchmarks does LLC measure performance against?
BBHY (high-yield bonds) and the LSTA (leveraged loans)
Why would a secured creditor prefer to hold a lien at the operating subsidiary level rather than at the holding company level?
Operating subsidiary level because it grants structural seniority, giving the creditor a direct, first-priority claim on the physical assets and cash flows that run the business.