3. Fixed Interest Flashcards
Who issues gilts, what are their maturities, and how regularly is interest paid?
Debt Management Office
5, 10, 30
Ultra-long gilts: 50, 55
Half-yearly
What is a convertible gilt?
Option to convert to longer-dated gilt
How do you calculate the initial/running/floating yield of a bond?
Coupon
______________
Market price
How do you calculate the redemption yield of a bond?
Effectively annualised ROI
Income over remaining term + capital gain/loss @ redemption
_________________________________________
Remaining term
_________________________________________
Price paid
When do gilts go ex-dividend?
7 working days before interest payment
How are gilts priced at exchange/brokerage?
Bought @ Offer, Sold @ Bid
Shown as clean price then adjusted by adding/deducting interest if sold cum/ex dividend
Describe the 3 yield curves
Normal = yield increases with longer time until redemption - locking in long-term security
Flat = yield stable over maturities
Reverse/Inverted = yield decreases with longer time until redemption (price increases) in expectation of interest rates falling - locking in higher rates
What is the tax treatment of gilts?
Capital gains exempt from CGT
Interest paid gross & taxed as savings income
Describe the following types of corporate bond:
- Debenture
- Loan stock
- Convertible loan stock
- Deep discount bond
- Zero coupon
- Speculative/junk
- Contingent convertible
- Debenture; secured against assets (fixed or floating)
- Loan stock; secured against shares
- Convertible loan stock; convertible to shares at fixed time + price
- Deep discount; low coupon, issued at discount to par, co. can call early
- Zero coupon; issued at discount to par; return is gain only
- Speculative/junk; high yield, price could increase
Contingent convertible; convertible to shares upon trigger event
What are the criteria for qualifying corporate bonds? (5)
Denoted in GBP and cannot be converted to another currency
Non-convertible to shares
No right to buy/receive shares
Reasonable commercial interest rate and not linked to profits
Redeemable at par
What is the tax treatment of qualifying corporate bonds?
Interest paid gross & taxed as savings income
Gains free from CGT
What are the criteria for deep discounted securities and what is their tax treatment?
Redemption value is >15% higher than issue price OR
Discount is >0.5% p.a (between issue price and redemption value)
Gains on sale/redemption taxed as savings income
What are Eurobonds and 3 key features?
Issued by govts or co’s in a different currency to the place of issue
- Higher minimum dealing amounts
- Interest can be fixed or variable
- Traded on stock exchanges
What are Permanent interest-baring shares and what is their tax treatment? (income tax + CGT)
Issued by building societies - fixed interest and perpetual
Paid gross & taxed as savings income
Gains free from CGT
