Asset Classes - Debt Valuation Flashcards
In a normal market, which one of the following is true?
The price of a short-term 5% gilt will be higher than the price of the 5% long-term gilt
An investor has £10,000 nominal of a convertible bond. Its conversion terms are 50 shares per £100 nominal at a price of £1 (per share). The share price is currently £4.00 per share. What would happen to the price of the convertible bond if the share price fell?
Fall
flat yield formula
FY = coupon / bond price
What primary feature of a bond price is reflected in the yield curve?
Inflation
If a company’s credit rating changed from AA to AAA, what would you expect to happen to the yield?
Price increases, yield decreases
Which ONE of the following best represents ten basis points?
0.1%
Which of the following is true if the UK government bond yield curve is inverted?
Yields on short-dated gilts are greater than yields on medium- and long-dated gilts
gross redemption yield
GRY = flat yield + yield on redemption
Why, when interest rates rise, do bond prices fall?
Bond yields stay in line with interest rates
Which of the following is true for a gilt trading above par?
Flat-yield > GRY > NRY
When the price of a bond changes, the yield also changes. An approximate change in the yield can be predicted using:
Modified duration
For which of these can you calculate a gross redemption yield?
ABC’s step-up bond 2031
Which of the following is the best description of the modified duration of a bond?
The change in the price of a bond for a given change in interest rates
Which of the following is TRUE with respect to the flat-yield and gross redemption yield on a bond trading BELOW par?
The GRY will be higher than the flat-yield
There will be a capital gain on the bond
If a 10% coupon paying bond has a price of £100 and a 15% coupon paying bond has a price of £150, which of the following is false assuming they both have the same maturity?
The gross redemption yield for both is identical
Which one of the following is not a usual method of bond quotation?
Price spread
If the credit rating on a corporate bond is upgraded, which ONE of the following is TRUE?
Coupon will remain the same and price will rise
A registered UK charity has invested in gilts. Which of the measures below is the most relevant to them?
Gross redemption yield
Which of the following would determine the shape of a normal yield curve?
Liquidity
Price paid
Price paid = clean price + accrued interest.
Modified duration
Modified duration is a measure of a bond’s volatility to interest rate movements. Modified duration is highest for bonds with:
- Low coupons
- Long maturity
- Low yields
Which of the following would lead to the highest increase in price of a convertible trading at a zero premium to par?
A large increase in the price of the underlying shares
According to the pure expectations theory, which of the following is the principal reason for an inverted risk-free government bond yield curve?
Short-term interest rates are high and expected to fall
What are inter-bank lending rates used to determine?
LIBOR
What happens to a bond if its credit-rating changes from sub-investment grade to investment grade?
Price increases, coupon stays the same
