2 - Fixed income secs

Question 1

inflation indices

Answer 1

RPI - retail price index = UK only - used by index linked gilts. arithmetic price avg of 700 goods and services

RPIX = RPI - mortgage repayments (as these typically track BofE base rat which is used to control inflation)

RPIY= RPI - mortgage repayments and VAT

CPI = consumer price index = globally harmonized, geometric avg, excludes housing costs, used by MPC

CPI tends to be lower than RPI due to formula effect

Question 2

Index linked gilts

Answer 2

Both coupon and redemption adjusted +/- for inflation (RPI)
ref date is 3 months prior to coupon/redemption RPI
adjust from issue level of RPI not most recent

Question 3

Corp bonds types

Answer 3

Debentures (secured debt)
- fixed charge [over assets] = bond secured with names asset e.g. a property
- floating charge - secured against pool of assets e.g. inventory/receivables

loan stock (unsecured debt)

INCREASING RISK