Bonds Flashcards
1
Q
who issues bonds mainly
A
corporates and government
2
Q
who helps corporates issue bonds
A
institutions eg investment banks
3
Q
what is the secondary market for bonds
A
the market where securities that have been issued previously are traded
4
Q
what does OTC stand for
A
over the counter
5
Q
stocks mostly trade on exchanges
where do bonds mostly trade
A
over the counter
(from buyer to seller)
6
Q
in what ways is the bond market different from the stock market
A
- most companies just issue one type of share at a common price where as lots of bonds can be issued at all different prices and maturity dates
- average size of a bond trade tends to be far larger than an equity trade
- bonds trade far less frequently so there is much less liquidity in bonds
7
Q
which are the most liquid type of bonds
A
government bonds
8
Q
do retail investors usually buy bonds
A
no far too complex
minimum trading price also very high so most often done by institutional investors
9
Q
is the issuer of the bond involved in the secondary market trading of the bond
A
no
10
Q
what is refinancing
A
when a company issues a new bond to pay off old bond debt
11
Q
what is a refinancing cliff
A
one huge outstanding bond that occurs at one point in time and needs to be paid off
12
Q
what is a better approach than having a refinancing cliff
A
a range of long and short term bonds so the refinancing risk is spread over time
13
Q
what are the sectors of the bond market
A
- treasury
2, agency - municipal
- corporate
- asset backed
- mortgage
14
Q
what is a treasury bond
A
securities issued by the US government
15
Q
what is an agency bond
A
securities issued federally related to institutions and government sponsored enterprises
16
Q
what is a municipal bond
A
securities issued by state and local government bonds
17
Q
what is a corporate bond
A
securities issued by corporations
18
Q
what is an asset backed bond
A
securities backed by pool of assets
19
Q
what does a bond price refer to
A
the price it is trading for on the secondary market
20
Q
what two elements about the bond are fixed
A
maturity date
coupon
21
Q
what type of relationship do the bond price and yield have
A
inverse
22
Q
what is the name of the price the bond is issued at
A
par
23
Q
when the bond is retraded, we state it in terms of its
A
yield
24
Q
if a bond is trading above par eg 110 what does this mean
A
the coupon must be too high
25
if a bond is trading below par eg 90 what does this mean
the coupon must be too low
26
if a bond is trading at par what does this make the coupon equal to
yield to maturity
27
why might the coupon of a bond be considered too high or too low
at the date of issue, the coupon is correct for that current climate
things change though such as inflation and interest rates and this can determine if the bond coupon is too high or too low
28
what are the main risk factors for the bond (things that can change the yield)
- interest rates
- expected inflation
- credit/default risk
- liquidity
29
what is the risk free rate in the eurozone
where the German government issue at
30
how does an increase in interest rates effect bonds trading in the secondary market
if interest rates are higher then the existing bonds are less attractive as the nominal value of their coupons is lower
31
how does increased inflation effect bonds already trading in the secondary market
makes less attractive because the nominal value of coupon is lower
32
how do equities tend to perform in high inflationary periods
they do fine as they have floating prices that they can adjust for inflation
33
how does increased risk effect bonds already trading on the market
riskier investment so will be below par value
eg in 2011 investors refuse to lend to Irish government
34
is more or less liquidity more attractive for bonds
more
35
two ways to measure interest rate risk
duration
convexity
36
what is duration (for measuring interest rate risk)
the sensitivity of a bond price to change in interest rate
37
how is duration usually stated (interest rate risk)
for every 1% change in interest rate, how much will the price of the bond fall
38
what else will effect the duration risk
maturity date of the bond
39
what is convexity
relationship between bond price and interest rate is not linear, it is curved
how curved = convexity
40
how can credit risk be measured
credit spread
credit default swaps
41
what is the credit spread of a return
the part that is attributed to its default risk
42
what is a credit default swap
derivative product that replicates bond exposure
43
which market is more liquid
- credit default swap
- bond
credit default swap
44
which bonds are not exposed to inflationary risk
floating rate bonds
45
what is a floating rate bonds
a bond which a coupon that is tied to inflation
46
what is the inflation linked bond in the US
TIPS (treasury inflation linked bond)
47
what is liquidity risk
the ease at which an issue can be sold at or near its value
48
how to measure liquidity risk
the size of the spread between the bid price and asking price
the bigger the spread, the more liquidity risk
49
why would investors buy bonds with negative yields
- bond prices may fall but overall they are a much safer investment product than equities, the alternative
- pension and insurance funds are long term and may have minimum allocation targets for bonds
- paying money to governments is profitable if a year later the prices go even more negative, can be sold for a profit
- required to hold them as part of a passive funds, as other bonds mature and roll off, they are replaced with new bonds
50
what is call provision
grants the issuer the right to repay the debt, fully or partially, before the scheduled maturity date
51
why would issuer use callable bonds (call provision)
option to get cheaper borrowing
52
what is a put provision
the bondholder has the right to ask to be repaid after a number of years
53
why would an investor want a putable bond (pull provision)
eg if issuers credit risk has worsened they can ask to be paid now to avoid risk of not being paid later
54
what is a convertible bond
the bondholder can opt to change the bond into shares
55
why might an investor want a convertible bond
want to play it safe with a bond but if things go well with the company, you will benefit more from equitiy
56
what is a currency bond option
the bondholder can choose the currency in which they would like to be paid
(coupon and principal)
57
who pays for the embedded option
whoever benefits from the option
rests with lender = higher coupon
rests with borrower - lower coupon
58
how much percent of new bond issues are green and social bonds
5-10%
59
is there a legal binding for proceeds from green bonds to be ringfenced
no
more of a statement of intent
60
examples of spending from social bonds
education, health, social housing, reducing inequality
61
what issues exist with green bonds
issues of reporting, accountability and standardisation
expected to become more standardised over time
62
what is a greenium
there is a greater demand for green bonds
but not so much supply
so willing to pay greenium
63
why are pension funds tax free
government trying to incentivise us to smooth consumption
64
what is the time frame of a money market
less than 1 year
65
what is the time frame of a cpital market
greater than 1 year
66
what is a zero coupon bond
does not make coupon payments
67
at what price do zero coupon bonds always sell at
discount
68
what is the compenstation for a zero coupon bond
the difference between the initial price and the face value ie the payout at the end
69
what is the YTM
the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond
70
what is bond pirce
present value of all the cash flows generated by the bond
ie the coupons and face value discounted at the required rate of return
71
what does it mean if the bond is selling at a discount
selling for less than the face value
72
what does it mean if the bond is selling at par valye
selling at face value
73
what does it mean if the bond is selling at a premium
selling for greater than the face value
74
what does an investor earn as a return when the bond trades at a discount
coupon rate < yield to maturity
return from coupons
face value that exceeds the price paid for the bond
75
what does the investor earn as return when the bond trades at a premium
coupon rate > yield to maturity
return from coupons
face value less than price paid for the bond
76
closer to the time of maturity of the bond, what price does the bond move towards
par value, face value
77
each time a coupon is paid, what does the price of the bond drop by
coupon amount
78
why are shorter term bonds less risky
discounted over a shorter period, present values are less dramatically affected by interest rates
79
what does a yield curve plot
yields of bonds that have equal quality but differing maturity rates
80
what does the slope of a yield curve tell us
an idea of future interest rate changes and economic activity
81
what is the normal slope for a yield curve
gentle upward sloping (normal rates of growth expected)
82
when is a steep upward sloping yield curve usually found
when bond holders think economy will improve quickly in the future
just at the beginning of economic expansion, at the end of recession
83
what does an inverted yield curve mean
investors trying to get in and lock rates before they fall even further
84
what is a prime bond rating
AAA
85
upper medium grade bond rating
A
86
medium grade bond rating
BBB
87
what is the conversion ratio of a convertible bond
how many shares can be converted from each bond
